Understanding Dynamics of Trust in Business Relationships
A thesis submitted in partial fulfilment of the requirements for the degree of Doctor of Philosophy in Marketing
Yimin Huang
School of Marketing Australian School of Business The University of New South Wales Sydney, Australia
April, 2010 ORIGINALITY STATEMENT
‘I hereby declare that this submission is my own work and to the best of my knowledge it contains no materials previously published or written by another person, or substantial proportions of material which have been accepted for the award of any other degree or diploma at UNSW or any other educational institution, except where due acknowledgement is made in the thesis. Any contribution made to the research by others, with whom I have worked at UNSW or elsewhere, is explicitly acknowledged in the thesis. I also declare that the intellectual content of this thesis is the product of my own work, except to the extent that assistance from others in the project's design and conception or in style, presentation and linguistic expression is acknowledged.’
Signed ……………………………………………......
Date ……………………………………………...... Abstract Trust has been widely studied in the context of business relationships and is viewed as one of the drivers for relationship development. However, it has long been treated as a static construct explained in terms of other relationship variables. The way it changes over time and the drivers of this have been largely ignored and underexplored. The research reported in this thesis adopts an evolutionary perspective in understanding the dynamics of trust in dyadic business relationships. In particular, it addresses two research questions. Firstly, how does trust change and develop over the course of a relation? Secondly, what are the underlying mechanisms that drive the dynamics of trust in relationship development?
Longitudinal case studies are conducted using event-based narrative analysis, assisted by the computer software of ETHNO. The event-based narrative analysis is still being developed and has not been used in marketing before. Collectively, these studies reveal important and interesting findings of the dynamics of trust in business relationships. A key conceptual distinction is made, that is often ignored in the literature, i.e. between trusting attitudes and trusting actions, though they are interconnected. The existence of trusting attitudes is a prerequisite for trusting actions to take place, but the occurrence of a trusting action is also impacted by trusting firms’ behavioral intentions subject to particular external, internal and relational environments at a given time. The trusting actions and their outcomes, in turn, reshape, redevelop and restructure the nature and extent of trusting attitudes held by partner firms in the relationship.
Different sets of mechanisms are identified underlying changes in trusting attitudes and the emergence of trusting actions. Changes/non-changes in trusting attitudes are mainly explained by cognitive mechanisms, such as learning, adapting, stereotyping, evaluating, affective, transferring, and institutionalizing mechanisms. The emergence of trusting actions is more strategic and controlled and is affected by not only cognitive mechanisms but also by various types of economic, psychological and emotional mechanisms.
Being one of the first efforts to investigate the dynamics of trust over time in real business relationships, this research fills an important knowledge gap. The research leads to the identification of several fruitful areas for future research including further studies of business relations and networks in other contexts and the development of agent based models of relationship and network dynamics and evolution. The results and the mechanisms identified are of value also to managers in terms of how to develop better strategies for developing, maintaining and using trust in business relationships. I DEDICATION
To my loving family
II ACKNOWLEDGEMENTS
Being the daughter to a professor, I was born with a bookmark in my mouth. I knew I wanted to be a good scholar, as my Dad, and to be that, I should be, first of all, a Dr.. But what I did not know was when the decision came to leave all my career behind and to go back to university to be a full-time PhD student, it was nothing to do with my dream but all about love. And the journey of completing this PhD has been filled with power of love since then.
First and foremost, I would like to thank Professor Ian Wilkinson for guiding me through to today’s achievement. Ian is my supervisor, but he is far more than simply being a supervisor. He has been a mentor, a good friend, my academic father. He has heard my laughters and seen my tears. He is always there to listen, to support, to help and to hug. I have benefitted greatly from Ian’s extensive knowledge base, but I am especially grateful for him to shape my critical and creative thinking by encouraging me to challenge. Intellectual argument between Ian and me, though I lost most of the time so far, is an integral part in shaping my academic rigor.
It would not have been possible for me to complete the tough and rough PhD journey without the supporting and loving environment in School of Marketing. I am especially indebted to Prof. Paul Patteron for building up such an environment, as well as for his generous support and continuous encouragement at various stages of my PhD. I wish to give special thanks to Marion and Nadia for always being around with love and care. I am grateful to Prof. Roger Layton and Prof. Mark Uncles for their constructive feedback and practical guidance to my research. I thank Margot, Paula and many other colleagues for their kindness and assistance.
I am so blessed to gain enormous peer support from the research student community in the School. My seniors, including Gary Buttriss, Emma Macdonald, Simon Kwok and Emma Wong, have been so kind to share their experiences and provide helpful opinions whenever needed. I am particularly lucky to have met my best friends during my PhD, Cathy Xu, Laypeng Tan, Hongwei Lu and Vinh La. I owe so much gratitude to them for their generous love and heartfelt support all the way along. We have been through many
III ups and downs. In the end, we find more about ourselves and see more in others. The journey, as put by Laypeng, then becomes a “bearable, serious fun”.
There are many people out of School of Marketing that I wish to thank to as well. Among them, I am especially indebted to Prof. Louise Young, for her constructive comment on my research and caring support at my difficult times. My gratitude also goes to Prof. Xiongwen Lu from School of Management at Fudan University, who introduced to me to the discipline of Marketing and fostered my initial interest in this area.
Last but never least, my sincerest and deepest gratitude goes to my family. I am truly indebted to my Mum and Dad for their trust in me and the sacrifices they have made to allow me to pursue my dream. I am thankful to my Dad, who has implanted in me some essential qualities to be a good researcher: enthusiasm, endurance and integrity. I am so gratetful to my Mum, who is always ready to listen and to share. And she makes me NOT a boring bookworm.
I am so blessed to have been loved and cared and supported by Daniel, my husband, another inquisitive mind in my family. He is a fountain of funny jokes and knows best how to cheer me up. While sometimes I could be an idea volcano, he is the person that cools me down and pulls me back to reality. So thank you, honey, for being an inspiration in my life.
Finally, here comes Zhiyu, the little angel sent by God to shine my life. Being a proud Mum, I am so motivated to be a better person, to make my daughter be the same prideful of me.
Love guided me to the journey of PhD. When I had thought the journey has finished, I suddenly realized it is just a beginning, never an end.
IV Table of Contents
Chapter 1 Introduction...... 1
Chapter 2 Literature Review (Part I)...... 4
2.1 Understanding business relationships: an IMP perspective...... 4 2.1.1 The nature of business relationships ...... 5 2.1.2 Structural characteristics of business relationships...... 7 2.1.3 Process characteristics of business relationships ...... 9 2.1.4 Research gaps in IMP studies ...... 11 2.2 Major studies on trust in business relationships...... 13 2.2.1 Background of research on trust in business relationships ...... 13 2.2.2 Major studies on trust in business relationships...... 14 2.2.3 Research gaps...... 21 Chapter 3 Literature Review (Part II)...... 25
3.1 Theories of organizational change ...... 25 3.2 Mechanisms ...... 32 Chapter 4 Conceptual Model and Propositions ...... 41
4.1 Initial conditions ...... 45 4.2 Ongoing relationship processes: production and reproduction over time...... 48 Chapter 5 Methodology ...... 58
5.1 Variable-based variance approach vs. event-based process approach in marketing research ...... 58 5.2 Research strategy ...... 64 5.3 Research methodology...... 68 5.3.1 Introduction of case study as the methodology...... 68 5.3.2 Case selection...... 70 5.3.3 Data collection ...... 75 5.3.3.1 Data collection for the main case on XtarSports-HBB relationship ...... 76 5.3.3.2 Data collection for supplementary cases...... 82 5.3.4 Data analysis ...... 84 Chapter 6 Case Analysis of XtarSports-HBB Relationship (1997-early 1998) ...... 91
6.1 Overview...... 98 6.2 External environment...... 100 6.3 Internal Environment ...... 101 6.4 Process of interaction in XtarSports-HBB relationship ...... 102 6.5 Trust development in the initial building phase...... 112 6.6 Discussion on propositions ...... 122 6.7 Discussion of mechanisms underlying dynamics of trust...... 124 6.7.1 Mechanisms related to trusting attitudes...... 125 6.7.2 Mechanisms related to trusting actions...... 128 Chapter 7 Case Analysis of XtarSports-HBB Relationship (Mid 1998-2001)...... 133
V 7.1 Overview...... 133 7.2 External environment...... 135 7.3 Internal environment ...... 137 7.4 Process of interaction in the relationship ...... 139 7.5 Trust development during the learning phase ...... 159 7.6 Discussion on propositions ...... 167 7.7 Discussion of mechanisms underlying dynamics of trust...... 169 7.7.1 Mechanisms related to trusting attitudes...... 169 7.7.2 Mechanisms related to trusting actions...... 175 Chapter 8 Case Analysis of XtarSports-HBB Relationship (2002-2004)...... 179
8.1 Overview...... 179 8.2 External environment...... 181 8.3 Internal environment ...... 182 8.4 Process of interaction in the relationship ...... 186 8.5 Trust development during the transitioning phase...... 205 8.6 Discussion of propositions ...... 215 8.7 Discussion of mechanisms ...... 215 8.7.1 Mechanisms related to trusting attitudes...... 215 8.7.2 Mechanisms related to trusting actions...... 217 Chapter 9 Case Analysis of XtarSports-HBB Relationship (2005-2006)...... 221
9.1 Overview...... 221 9.2 External environment...... 223 9.3 Internal environment ...... 223 9.4 Process of interaction in the relationship ...... 228 9.5 Trust development during the rebuilding phase...... 241 9.6 Discussion of propositions ...... 246 9.7 Mechanisms underlying the dynamics of trust ...... 246 9.7.1 Mechanisms related to trusting attitudes...... 246 9.7.2 Mechanisms related to trusting actions...... 249 Chapter 10 A Model of Dynamics of Trust in Business Relationships ...... 252
10.1 Dynamics of trust in business relationships...... 252 10.2 A model of the dynamics of trust in business relationships...... 258 10.3 Mechanisms underlying the dynamics of trust in business relationships ...... 264 10.4 Conclusion ...... 282 Chapter 11 Analysis and Discussion of Supplementary Case I ...... 284
11.1 Relationship Initiation and the dynamics of trust ...... 285 11.1.1 Relationship initiation ...... 285 11.1.2 Development of initial trust and underlying mechanisms...... 286 11.1.3 Trusting actions and underlying mechanisms...... 289 11.2 Relationship development and the dynamics of trust ...... 290 11.2.1 Relationship development...... 290 11.2.1.1 Trial phase (2000-mid 2001)...... 291 11.2.1.2 Unfolding phase (mid 2001-2003)...... 292 11.2.1.3 Stable phase (2004-2006)...... 295
VI 11.2.2 Trust development and underlying mechanisms...... 296 11.2.3 Trusting actions and underlying mechanisms...... 299 11.3 Conclusion ...... 302 Chapter 12 Analysis and Discussion of Supplementary Case II...... 307
12.1 Relationship initiation and the dynamics of trust...... 307 12.1.1 Relationship initiation ...... 307 12.1.2 Development of initial trust and underlying mechanisms...... 309 12.1.3 Trusting actions and underlying mechanisms...... 311 12.2 Relationship development and the dynamics of trust ...... 313 12.2.1 Relationship development...... 313 12.2.2 Trust development and underlying mechanisms...... 315 12.2.3 Trusting actions and underlying mechanisms...... 318 12.3 Conclusion ...... 319 Chapter 13 Conclusion ...... 323
13.1 Academic contributions and managerial implications ...... 326 13.1.1 Academic contributions ...... 326 13.1.2 Managerial implications...... 329 13.2 Quality issues and research limitations...... 332 13.3 Directions for future research...... 336 13.4 Conclusion ...... 338
VII List of Tables
Table 2.1 Main antecedents of trust in business relationships...... 19
Table 2.2 Main consequences of trust in business relationships...... 20
Table 3.1 Process Theories of Organizational Development and Change...... 27
Table 3.2 Major definitions of mechanisms...... 34
Table 5.1 Comparison of variance and process approaches ...... 60
Table 5.2 Summary of the relationships recommended in exploratory interviews...... 74
Table 5.3 Summary of data collected for the main case on XtarSports-HBB relationship ...... 81
Table 5.4 Summary of data collected for supplementary cases...... 83
Table 6.1 Codes of events for the summary chart for XtarSports-HBB relationship .....94
Table 6.2 Explanation of coded events in Figure 6.1...... 95
Table 6.3 ETHNO codes of key events for the initial building phase in Figure 6.4.....111
Table 6.4 Major features of initial building phase in XtarSports-HBB relationship ....121
Table 6.5 Summary of propositions...... 122
Table 7.1 ETHNO codes of key events for the learning phase in Figure 7.3 ...... 158
Table 7.2 Major features of learning phase in XtarSports-HBB relationship...... 166
Table 8.1 ETHNO codes of key events for the transitioning phase in Figure 8.3 ...... 204
Table 8.2 Major features of transitioning phase in XtarSports-HBB relationship...... 214
Table 9.1 ETHNO codes of key events for the rebuilding phase in Figure 9.3...... 240
Table 9.2 Major features of rebuilding phase in XtarSports-HBB relationship ...... 245
Table 10.1 Summary of key mechanisms for trust development...... 267
Table 10.2 Summary of key mechanisms for trust activation...... 273
Table 11.1 Comparison of mechanisms for trust development identified in the main case and supplementary case I ...... 304
VIII Table 11.2 Comparison of mechanisms for trust activation identified in the main case and supplementary case I ...... 306
Table 12.1 Comparison of mechanisms for trust development identified in the main case and supplementary case II...... 320
Table 12.2 Comparison of mechanisms for trust activation identified in the main case and supplementary case II...... 322
Table 13.1 Summary of proposition evaluation...... 324
IX List of Figures
Figure 3.1 Typology of three types of social mechanisms...... 37
Figure 4.1 The evolution of trust in interfirm relationships...... 44
Figure 6.1 Summary chart for XtarSports-HBB relationship history (1997-2006) ...... 93
Figure 6.2 Summary chart for XtarSports-HBB initial building phase (1997-early 1998) ...... 99
Figure 6.3 Critical events in the initial building phase (1997-early 1998) ...... 109
Figure 6.4 ETHNO event sequence chart for XtarSports-HBB initial building phase .110
Figure 7.1 Summary chart for XtarSports-HBB learning phase (mid 1998-2001)...... 134
Figure 7.2 Critical events in the learning phase (mid1998-2001)...... 156
Figure 7.3 ETHNO event sequence chart for XtarSports-HBB learning phase...... 157
Figure 8.1 Summary chart for XtarSports-HBB transitioning phase (2002-2004)...... 180
Figure 8.2 Critical events in the transitioning phase (2002-2004)...... 202
Figure 8.3 ETHNO event sequence chart for XtarSports-HBB transitioning phase ....203
Figure 9.1 Summary chart for XtarSports-HBB rebuilding phase (2005-2006)...... 222
Figure 9.2 Critical events in the rebuilding phase (2005-2006) ...... 238
Figure 9.3 ETHNO event sequence chart for XtarSports-HBB rebuilding phase ...... 239
Figure 10.1 Model of dynamics of trust in business relationships...... 259
Figure 10.2 Summary of key mechanisms for trust development in a business relationship...... 278
Figure 10.3 Summary of key mechanisms for trust activation ...... 281
Appendix A: Suggested Interview Questions for Informants from HBB China for XtarSports-HBB Relationship Case………………………………………………370
X Chapter 1 Introduction
The forecast that the role, development and performance of companies will be explained by their ability to develop relationships (Hakansson and Snehota 1995) has been fully realized in the business arena today. Given the importance of business relationships and networks, the ability that firms possess to survive and thrive in business relationships now becomes a core competence (Ritter, Wilkinson and Johnston 2002). The management of business relationships requires firms to apply strategies to share power, communication, openness, conflict-resolution and trust. Among them, trust is a key dimension affecting the performance of business relationships and their evolution. As pointed out by Hirsch (1978), trust is a “public good, necessary for the success of economic transactions” (p78). This is agreed by Lewis and Weigert (1985) who claim that trust is “indispensable in social relationships” (p968), and Zucker (1986), who states that trust is “vital for the maintenance of cooperation in society and necessary as grounds for even the most routine, everyday interactions” (p56).
Trust has been studied widely (e.g., Arnulf, Dreyer and Grenness 2005; Doney and Cannon 1997; Dwyer, Schurr and Oh 1987; Halliday 2003; Young and Wilkinson 1989; Zaheer, McEvily and Perrone 1998). Its definition and dimensions have been examined (e.g., Child 1998; Chowdhury 2005), typologies have been proposed and measured (e.g., Doney and Cannon 1997; Young 1993), and precursors and outcomes have been subject to theory and empirical analysis (e.g., Morgan and Hunt 1994; Smith and Barclay 1997). These studies have made a significant contribution to our understanding of trust in business relationships. However, they have given only limited attention to the dynamics of trust. The majority of models of trust are static, treating trust as a fixed variable explained in terms of associations with other variables in cross sectional studies. Rare efforts have been made to investigate how trust changes and evolves over time together with relationship development. Yet as observed by Ring and Van de Ven (1994), with increases in the uncertainty, complexity, and duration of economic transactions within and between firms, it becomes increasingly important for scholars and managers to understand developmental processes; how governance structures emerge, evolve and dissolve over time.
1 The research presented in this thesis addresses the call from Huemer (2004a) and other researchers that processes whereby trust is built, mobilized and redeveloped should be taken into account in studies of trust in business relationships. The purpose of this research is to develop an analytical framework for understanding the dynamics of trust and to identify underlying mechanisms and processes that explain why and how changes occur in the conditions of trust as well as the use of trust in relations. It is argued in this thesis that trust is an evolving experience. A business relationship evolves as a product of an ongoing process of configuring and reconfiguring relationship structure, taking place through the outcomes and experience of the actions and interactions (IMP Group 1997) occurring within and between relations over time.
Longitudinal case studies using event-based narrative analysis are conducted in this research to examine the evolution of trust in business relationships as well as to identify generative mechanisms underlying the changes/non-changes. An important output of this research is the development of a process theory of the dynamics of trust, which involves an interacting set of trusting attitudes and trusting actions. Trusting attitudes are continually being shaped and restructured by the actions and interactions within and between firms as well as the interpretations of the parties involved. At the same time, trusting attitudes, together with the contextual factors within the organizations and relationships, affect the trusting actions taken by firms, the outcomes that result and how they in turn produce, reproduce or change the conditions of trust, which set the stage for future action and interaction. A different mix of mechanisms, with some overlap, operates to generate changes/non-changes in trusting attitudes and to impact the occurrence of trusting actions. The identification of key causal mechanisms enhances the explanatory power of the process theory in understanding relationship dynamics.
This research makes important theoretical and methodological contributions. It enhances the understanding of dynamics of trust in business relationships with a distinction between trusting attitudes and trusting actions. The development of a process theory with underlying mechanisms fills the gap in the literature of relationship dynamics. Besides, this research goes beyond the linear statistical relationship to explore the generative mechanisms using event-based narrative analysis, in combination
2 with the computer software of ETHNO program. Event-based narrative analysis is a methodology that is promising for studies of changes and dynamics yet still novel and being developed in marketing. This study presents a useful example of the use of the methodology that helps to further develop and refine it in a marketing context. This study also has important managerial implications regarding how managers are able or not to create and enhance a trusting environment in a relationship so as to enhance the gains of collaborative and competitive advantages out of the relationship. A number of fruitful areas for future research emerge from this research that will further develop our understanding of relationship and network dynamics and evolution.
This thesis consists 13 chapters and is organized in the following way. Chapter 2 presents an overview of the main theories of business relationships including the major studies of trust so as to identify research gaps and develop research questions for this research. In Chapter 3, theories of organization change and the literature on mechanisms from various disciplines are reviewed, as a theoretical lens through which the research topic can be investigated. Building on these literature reviews, a conceptual model is presented and propositions are developed in Chapter 4 for understanding the dynamics of trust in business relationships. Chapter 5 discusses the methodology. Research strategies are evaluated and the case study methodology for analysing and identifying event structures and causal mechanisms is described. The findings of the main case are presented in Chapters 6, 7, 8 and 9, covering each of the four developmental phases identified in the relationship history. The discussion is summarized in Chapter 10, in terms of a revised model of the dynamics of trust in business relationship. Chapters 11 and 12 report the findings in the supplementary cases, which test for the existence of the mechanisms identified in the main case in a different context. Finally, Chapter 13 concludes the thesis with a discussion on research contributions and limitations as well as directions for future research.
3 Chapter 2 Literature Review (Part I) ---Review on business relationships from IMP perspective and studies on trust
The literature review in this thesis is split into two parts. In this chapter, I review the nature of and processes within business relationships from an IMP perspective to set the theoretical base for the study. Following that, major studies of trust in interfirm relations are revisited to identify research gaps and construct research questions for this study. In Chapter 3, extant theories of organization change are discussed leading to the adoption of an evolutionary approach. The concept of generative mechanisms is then discussed including their role in evolutionary explanation.
Relationship marketing has been an important theme in marketing when firms have to interact with their suppliers, competitors, customers, complementors and associates to achieve competitive advantages. Relationship marketing has been widely researched in different domains, including consumer markets, services marketing, distributional channels and strategic alliances. Among the various perspectives, the Industrial Marketing and Purchasing (IMP) perspective places a particular focus on interfirm relationships. It views business markets as borderless webs of connected business relationships (Halinen, Salmi and Havila 1999) and studies how firms act and interact in relationships to achieve their respective goals (Ford, Hakansson and Johanson 1986; Hakansson and Snehota 1997). The IMP perspective contends that it is necessary to understand the goals and motives of both suppliers and buyers as they interact so as to understand the development of business relationships. The domain and conceptual foundations of the IMP perspective make it an appropriate angle to examine the dynamics of trust in business relationships.
2.1 Understanding business relationships: an IMP perspective Business relationships can be seen as one of the most valuable resources that a company possesses (Gadde, Huemer and Hakansson 2003; Gulati, Nohria and Zaheer 2000; Hakansson 1987). However, the concept of “relationship” is slippery and it is not easy to define. Hakansson and Snehota (1995) have offered a tentative definition that a relationship is “mutually oriented interaction between two reciprocally committed parties” (p25), while Wilkinson (2008) summarizes in a similar way that a relationship
4 is an interconnected set of transactions over time involving at least two parties. Wilkinson and Young (2004) have defined relationships as a pattern of behavior over time that involves a continual process of expression, reproduction, change and evolution. Relationship is like a dance which is actively co-produced by interacting parties through time or it ceases to exist (Wilkinson 2008). Though hardly complete and comprehensive, these definitions can be taken as a starting point to understand the complexity of business relationships.
2.1.1 The nature of business relationships Business relationships can be distinguished in various ways. Relationships can be characterized as arm’s length, followship, leadership and mutual based on relative dependence and power (Larson 1992). Alternatively, business relationships can be viewed in terms of the mix of cooperative and competitive elements and hence, categorized into high/low cooperative and competitive relationships (Young and Wilkinson 1997). With a particular focus on relationship atmosphere, Wong, Wilkinson and Young (Forthcoming) did a cluster analysis based on 345 cases of business relationships and identified five types of relationships, namely, disgruntled follower, manipulative leader, benevolent independent, arm’s length and close. Futhermore, an empirical study conducted in the automobile industry in the USA and Japan reveals four types of relationships, namely, strategic partnership, captive buyer, captive seller and market exchange (Bensaou 1999). Another major field research was carried out by Cannon and Perreault (1999), who administered a nationwide study of purchasing relationships in a variety of industries in the USA. The study reveals eight types of buyer-seller relationships, including basic buying and selling relationship, bare bone relationship, contractual transaction relationship, custom supply relationship, cooperative systems relationship, collaborative relationship, mutually adaptive relationship and customer-is-king relationship. These relationships score differently in availability of alternative suppliers, supply market dynamism, importance of supply, complexity of supply, customer satisfaction with supplier and supplier performance. For example, basic buying and selling relationship has the least developed operational linkages and adaptations, similar to arm’s length market relations with simple, low- value and non-strategic purchases. On the other hand, collaborative relations have the highest level of cooperation and information exchange. Such kind of partnership may
5 involve long-term contracts with chosen suppliers and are less likely to be challenged to respond to special types of market conditions.
The underlying dimensions or substance of relationships have been conceptualised by IMP researchers as composed of activities, resources, actors and schemas (Hakansson and Snehota 1995; Welch and Wilkinson 2002). Through the interactions taking place in relations mutual adaptations and adjustments take place in the activities, resources, actors and schemas involved that characterise the relation, resulting in activity links, resource ties, actor bonds and schema couplings.
Activity links refer to the economical, technical, administrative, operational and other activities of a firm connected and adapted to those of its partner’s. Activities are linked and coordinated. Resource ties develop as firms orient, exchange or access each other’s resources in carrying out their activities. When tied together, the existing resources can be activated, oriented, adapted and integrated. As a result, new resource combinations arise. Firms establish actor bonds in professional and social settings in business relationships, which results in what is described as a relationship atmosphere. The actor bonds affect firms’ behavior and identity as well as how they perceive and respond to each other. Actor bonds condition the ways firms get involved in activity coordination and resource exchange (Gadde, Huemer and Hakansson 2003), and the nature and strength of actor bonds change as the relationship evolves. Schema couplings refer to the interrelated plans and ideas of partner firms which become adapted to each other over time. These ideas are “reinforced, communicated, modified and combined” (Welch and Wilkinson 2002, p42) with other ideas through which idea logics are formed and connected within and between relationship participants.
The four dimensions discussed above are not independent and isolated but instead, there is an interplay among the activity links, resource ties, actor bonds and schema couplings (Hakansson and Snehota 1995; Jahre and Fabbe-Costes 2005; Welch and Wilkinson 2002; Wilkinson and Young 2001). Each actor involved in diversified activities uses its resources guided by its goals and theory in use or schemas. The range and types of activities actors are able to pursue are restricted by existing resources but evolve as actors develop their capabilities and create and co-create other resources. Actors act and
6 react based on their schemas, which can be reinforced or undermined in actions and interactions. New ideas might be introduced to the relationship and become connected with existing ideas, which work together to affect activity links, resource ties and actor bonds.
The interconnectivity of activities, resources, actors and schemas between firms is the ground on which relationship structures are formed and interactive processes within and across relationships take place. The structuring of relations takes place through the interactions taking place, which both shape and are shaped by existing relationship structure. The structural and process characteristics of business relationships are reviewed in details in the following sections.
2.1.2 Structural characteristics of business relationships Organizations are defined as goal-directed, boundary-maintaining and socially constructed systems of human activities (Aldrich 1999). However, firms’ involvement in relationships with others makes the boundary for each individual firm more diffuse, as the existence of relationships points to the importance of mutual interdependencies between firms (Ford 1997; Hakansson and Snehota 2000; Holm, Eriksson and Johanson 1999; Johanson and Vahlne 2003b). The interdependence between firms is a function of the value of the resources each firm possesses and creates when actor bonds, activity links, resource ties and schema couplings bind firms together. The different types of interdependences are interlaced in business activities in general and affect the development of business relationships. Relational rents (Dyer and Singh 1998), such as reduced cost and increased profits, knowledge acquisition, innovation and market access, can be captured through the interdependence between firms in technology, knowledge, social relations, administrative systems and legal ties (Hakansson and Snehota 1995). The interdependence can be both positive and negative in terms of how the actions of a firm help or hinder its partner firm’s efforts to achieve their objectives (Ritter, Wilkinson and Johnston 2004). The nature of the interdependence defines the basic relationship situation, but the bases of interdependence are not fixed. They change over time as the resources, knowledge and experience of the involved firms develop (Wilkinson and Young 2005a).
7 Firms in a focal business relationship are connected to other firms that form a business network which comprises “a set of two or more connected business relationships” (Anderson, Hakansson and Johanson 1994, p2). Therefore, the interdependence exists not only between firms in a business relation but between relationships as well, through which activity patterns, web of actors, resource constellation and schema configurations are made (Hakansson and Snehota 1995; Welch and Wilkinson 2002). Connectedness between relationships refers to the extent to which “exchange in one relation is contingent upon exchange (or non-exchange) in the other relation” (Cook and Emerson 1978, p725), i.e. relationships are connected in that a given relationship affects and is affected by what happens in certain other relationships (Anderson, Hakansson and Johanson 1994; Håkansson, Havila and Pedersen 1999; Hakansson and Snehota 1995; Halinen, Salmi and Havila 1999). Every relationship should be seen as embedded in network and judged in relation to the connected relationships (Turnbull, Ford and Cunningham 1996). Connectedness produces consequences, as observed by researchers especially from the IMP group (Hakansson and Snehota 2000; Wiley, Wilkinson and Young 2006; Wilkinson and Young 2001). The connectedness of business relationships may blur the boundary of a single business relationship. Such that, for example, domino effects can be detected in that the value and content of a business relationship can be altered through successive changes in related relationships despite the absence of actions within the focal relationship (Hertz 1999). Also, “butterfly effects” exist as well in complex systems like relations and networks, which means that a small change in a relationship can have large consequences over time elsewhere in a network (Wilkinson 2006).
The existence and the connectedness of relationships are the network context that gives specific “faces” to the environment of the firm (Anderson, Hakansson and Johanson 1994). As a result of its survival in the network context, the firm develops its network position which describes its portfolio of relationships and the rights and obligations that go with it, including access to resources of other network members, reputation as a partner in business relationships and expectations that the firm and its potential partners have for future relationships (Turnbull, Ford and Cunningham 1996). A firm’s network position is a dynamic concept in that a firm’s activities in a network are affected by a set of factors that develop over time, including objectives, competences, power and past
8 experiences (Freytag and Ritter 2005). A firm’s network position is perceived differently by various firms in the network, which defines the firm’s network identities (Hakansson and Johanson 1988). Network identity captures the perceived attractiveness (or repulsiveness) of a firm as an exchange partner based on its unique set of connected relations with other firms coupled with the rights and obligations that go with them. A firm would perceive its engagement in a relationship with its partner firm strengthening and supportive to its network identity when resource transferability, activity complementarity, actor-relation generalizability are anticipated in the relationship, on the other hand, deleterious effects on network identity are expected to occur with anticipated resource particularity, activity irreconcilability, actor-relation incompatibility (Anderson, Hakansson and Johanson 1994). A further source of constructive and deleterious effects is suggested by Welch and Wilkinson (2002). Constructive and deleterious effects arise due to how schemas developed in connected relationships produce positive or negative effects in a focal relation, i.e. how schemas enhance or constrain the vision and understanding of focal firms about their own and others’ network identities (Wiley, Wilkinson and Young 2006).
While a firm’s network position refers to the placement of the firm in a network, its network identity is dependent on context-dependent perceptions of others. It reflects how other firms view the focal firm and the evaluation mechanisms will differ among firms. Network identity plays a role in a firm’s choice of potential partners and of getting chosen by others as a potential business relationship partner (Wilkinson, Young and Freytag 2005). It thus can be viewed as a part of a firm’s strategic resources, though not directly under its control.
2.1.3 Process characteristics of business relationships Interaction is a core process in business relationships in which technical, social and economic issues are involved (Hakansson 1982; Hakansson and Snehota 2000; Turnbull and Cunningham 1981). Firms are continuously involved in a wide range of interactions in business relationships as they are connected in terms of activities, actors, resources and schemas, hence, they are always existing in an “interacted environment” (Ford, Hakansson and Johanson 1986). The interactions appear as a series of acts and counteracts (Hakansson and Snehota 1997) that are influenced by the overall
9 atmosphere in business relationships and the external environment that involves network structure, market structure and the social system (IMPGroup 1997). Through interactions, both cooperation and conflicts may occur, which motivate firms to learn and adapt technically, logically and administratively to coordinate the resources, activities and schemas (Hakansson and Snehota 1995; Hallen, Johanson and Seyen- Mohamed 1989; Jahre and Fabbe-Costes 2005). Out of interactions, understandings of each other are developed and the capabilities of managing relationships are honed, which affect how firms act and react as well as how they perceive their partners, which in turn create or weaken interdependence in the relationship.
Naturally, companies always try hard to control the relationship and network surrounding them so that their own objectives can be achieved. However, as observed by Hakansson and Ford (2002) and Wilkinson and Young (2001), the more successful a company is in controlling a business relationship or network, the less innovative and dynamic the relationship and network can become because actions and responses become restricted to what only the controlling firm sees and wants. The dynamic character of interaction increases the variety of responses and understanding that is possible and indicates the equally important role of both partner firms in co-producing and co-regulating the outcome of their actions and reactions. The process involves “initiating and responding, acting and reacting, leading and following, influencing and being influenced, planning and coping, strategizing and improvising, forcing and adapting” (Ritter, Wilkinson and Johnston 2004, p178). These proactive and reactive elements work simultaneously as relationships develop and suggest that determining what partner firms have to do is an unrealistic view to manage relationships (Ford 1997). Instead, to manage business relationships is to manage interactions in relationships (Ritter, Wilkinson and Johnston 2004). Managing interactions refers to a firm’s using and getting used by interactions to enhance their abilities to see, think and respond in these interactions. Such an ability to effectively manage interactions in business relationships is termed as network competence by Ritter and Gemunden (2003). It could be a core competency that a firm possesses and one of the critical skills that it needs to achieve its goals in relationships.
10 2.1.4 Research gaps in IMP studies Relationships are organized patterns of interdependence and interaction with their own substance of activity links, resource ties, actor bonds and schema couplings. Firms are directly connected to their partners in business relationships and at the same time, part of a larger network involving relationships to counterparts (Gadde, Huemer and Hakansson 2003). Interacting is the most fundamental process that a firm has to experience in business relationships. It takes place in both professional and social settings where firms influence their partners and are influenced as well (Hakansson and Ford 2002).
The existence of interdependence and interaction in business relationships calls for a pluralistic view in studying business relationships in that very few relationships are isolated from a broader network, nor are they the product of actions by one party. Two useful perspectives are identified to increase the understanding of business relationships. Firstly, firms coevolve with the relationships as they constantly learn and adapt in interacting with partners. While a business relationship evolves as a product of the interaction, firms are also the products of their relationships and their future is dependent on what happens in these relationships. Secondly, the interconnectivity and interaction determine the indeterminateness in business relationships (Ford, Hakansson and Johanson 1986; Gadde, Huemer and Hakansson 2003). Though the overall pattern of business relationships seems to be relatively stable, continuous changes may occur in their content and strength as firms adapt to and interact with each other in a business relationship. The usual distinction between a firm and its environment as well as between a relationship and its network is blurred (Snehota 1990). This means that the outcomes and consequences of actions by a firm are not determined beforehand as planned or expected. They depend on interactions with and interpretations by its partners or even by changes in connected relationships. Neither firm is able to dominate the relationship and shape it to its own will. Changes arise and their meanings lie in the context where firms are located and connected to other firms. In short, it is more appropriate to study business relationships from the perspective of “networkING, influencING, and interactING, i.e. processes instead of outcomes” (Freytag and Ritter 2005, p644).
11 Though IMP researchers are aware of the general importance of relationship dynamics, actual studies that focus on the dynamic aspects of business relationships have been few as revealed in a review of IMP Conferences from 1998 to 2003 (Windischhofer, Jarvelin and Mittila 2004). Despite the fact that it has been changing in recent years (e.g., Chou and Zolkiewski 2009; Ford and Redwood 2004; Nystrom, Tornroos and Ramstrom 2008), the majority of the studies still focus on structural issues rather than investigating dynamic processes. As a result, a good deal more is known about how relationships structure and look, measured by intensity, strength and frequency, than about how changes come about within these relationships (Anderson, Havila, Andersen et al. 1998). The meaning of time (Halinen and Tornroos 1995) has often been neglected in IMP studies of business relationships, in spite of the intrinsic dynamics indicated in the interaction and network approach in IMP perspective.
Such a research gap is evident not only in IMP studies but in the general business marketing literature as well. Some years ago Dwyer, Schurr and Oh (1987) called for more research on transitions in business relationships, for a thorough understanding of relationship evolution. Yet Narayandas and Rangan (2004) point out almost twenty years later that there is still little empirical research in business marketing which informs academics and practitioners about the process through which industrial buyer- seller relationships evolve over time. Most recently, Dagnino and his colleagues (2008) point out that the existing research on interfirm relations and networks is mainly static and they urge researchers to enhance their appreciation of the evolutionary dynamics of interfirm relationships. To do so, an awareness of time is essential as a perception of the continuum of past, present and future is crucial to understanding relationship evolutions (Easton and Araujo 1994).
With the IMP perspective explained as an appropriate perspective to understand relationship dynamics, now I turn to the discussion on trust in business relationships. Major literature will be reviewed in the following section to identify research gaps and research questions to be investigated in this research.
12 2.2 Major studies on trust in business relationships 2.2.1 Background of research on trust in business relationships The traditional approach to marketing has its roots in consumer marketing, which has been built around the concept of the marketing mix (Ford 1997). However, a significant change in perspective occurred in early 1980s, in part as the result of the influence of IMP theories and research, in the growing recognition that more firms are engaged in relationships with other firms and have established contact patterns to enhance the effectiveness and the efficiency of transactions. This was not a change in the world but a change in ideas about the world that relations matter, not just isolated transactions. This inspired a boom in research on buyer-seller relationships especially using an interaction approach. The emergence of interactions and relationships as the conceptual domain of research has been seen as a general paradigm shift in marketing (Parvatiyar and Sheth 1994) and since then, it has had widespread impact on consumer and services marketing.
Business relationships have been extensively studied in the contexts of distribution channels, supply chains and recently, the service sector. They are viewed through two primary lens, namely, economic and behavioral dimensions.
Williamson’s work (1975) on transaction costs and the nature and costs of interorganization governance has become a platform on which researchers have built a conceptual base for the examination of interfirm relationships (e.g., Barthelemy 2001; Frazier, Spekman and O'Neal 1986; Jeffrey 1997; Madhok and Tallman 1998; Parkhe 1993; Uzzi 1999). This analysis of economic governance, especially the boundaries of firms, won Williamson a Nobel Prize in Economics in 2009. In this framework, the activities and tasks that firms perform in business relationships are interpreted in terms of transaction costs and values. According to Williamson (1981; 1975), transaction costs include the costs of reaching an agreement between two parties, adapting the agreement to unexpected contingencies as the relationship unfolds and enforcing the terms in the agreement. The nature of a business relationship is understood in terms of economic exchanges, and tradeoffs between the coordination and specialization of activities, and how these underlie relationship structure and its development.
13 Economic theory has been helpful in understanding the intention of firms to build more collaborative relationships as well as factors that may help to facilitate these more cooperative linkages between partners, such as frequency and size of transactions, the presence of asset specificity and the degree of uncertainty (Williamson 1981). However, it makes unrealistic assumptions of the market environment and falls short of understanding fully the norms and values that link firms (Spekman 1996). Worse than that, the focus on the economic efficiency in business relationships leads to a static approach which ignores relationship dynamics and the processes by which structures change.
As observed by Borch and Arthur (1995), networks consist of fine and delicate ties well hidden behind the material aspects of the exchange relationship. These call for a different lens to understand business relationships. Studies of the behavioral dimensions of business relationships were initiated as early as in the 1970s and prospered in 1980s. Researchers explored concepts including power, conflict, trust, and commitment and later expanded these to include social bonds, adaptation, satisfaction, cooperation, reciprocity, communication, etc. These studies have produced more systematic conceptualizations of relationship dimensions that allow the environmental and interactive effects to be incorporated into relationship models (Wilkinson 2001).
Research on behavioral dimensions of business relationships has indicated that behavioral elements play a critical role in the performance outcomes of relationships (e.g., Noordewier, John and Nevin 1990). Among these behavioral variables, trust is considered as one of the most important factors in the governance structure, influencing how business relationships perform (e.g., Morgan and Hunt 1994; Young and Wilkinson 1989). I now turn to a review of major studies of trust in business relationships, followed by identification of research gaps in this area. This leads to the specification of research questions for the longitudinal study reported in this thesis.
2.2.2 Major studies on trust in business relationships Virtually every commercial transaction includes an element of trust, and trust plays a central role in the formation, development and maintenance of business relationships (Morgan and Hunt 1994). Trust is usually contrasted with regulation and opportunism
14 but only exists when one party can rely on another to act in an expected way. The presence of trust can play an important role in uncertain environments where parties are interdependent, as it helps firms cope with uncertainty by reducing perceived risk (e.g., Axelrod 1984; Sabel 1993; Selnes 1998) and it helps compensate for lack of information about future events (e.g., Bradach and Eccles 1989; McCullagh 1978).
Research on trust has been interdisciplinary as it draws on a variety of theoretical perspectives from social psychology, philosophy, sociology, economics and marketing. Lewicki and Bunker (1995) contend that research on trust can be categorized into three primary groups, each representing particular disciplinary lens and filters, namely, personality theorists’ view of trust as an individual difference, sociologists’ and economists’ view of trust as an institutional phenomenon, and social psychologists’ view of trust as an expectation of another party in a transaction.
Probably because trust is tackled as a concept from so many disciplines, it is not uniformly defined (Geyskens, Steenkamp and Kumar 1998). Drawing on Rotter’s (1967) classic view that trust is “a generalized expectancy held by an individual that the word of another...can be relied on”(p651), Morgan and Hunt (1994) conceptualize trust as existing when one party is confident of its exchange partner’s reliability and integrity. However, trust is limited if a party is confident of the other’s dependability yet not willing to rely on that party. This behavioral intention to rely on another is ignored in Morgan and Hunt’s concept but is incorporated in Moorman, Deshpande and Zaltman’s (1993) definition that trust is “a willingness to rely on an exchange partner in whom one has confidence”(p82). This echoes the point of Lewis and Weigert (1985) who include behavioral trust as a third component of trust, which constitutes actions that flow from a state of cognitive and affective trust. Integrating these definitions, trust is defined in two ways in this study, as a party’s belief in the reliability of an exchange partner and the party’s readiness to behave accordingly.
Trust has long been recognized as a multidimensional concept, yet expressed in different ways in literature. For example, Rousseau and his colleagues (Rousseau, Sitkin, Burt et al. 1998) suggest deterrence-based, calculus-based and relational trust, while Shapiro et al. (1992) categorize trust as being based on calculus, knowledge and
15 identification. Sako (1997) distinguishes among friendship trust, contract trust and goodwill trust, according to settings in which parties interact with each other. Inspired by interpersonal research (e.g., Deutsch 1958; Larzelere and Huston 1980), trust in business-to-business research has been conceptualized with two dominant theoretical dimensions identified, namely, credibility (e.g., Anderson and Weitz 1989; Dwyer, Schurr and Oh 1987; Sako 1992) and benevolence (e.g., Andaleeb, Lee and Gruneisen 1992; Anderson and Narus 1990; Ring and Van de Ven 1992). The former dimension rests upon confidence in the partner firm’s expertise and ability to perform and fulfil relationship obligations, while the latter is a belief in the goodwill of a firm and its genuine interest in seeking joint gains and welfare with its partner. Although conceptually distinct, the dimensions of credibility and benevolence are so intertwined that they may not be operationally separable (Geyskens and Steenkamp 1995; Larzelere and Huston 1980), which indicates that the two facets of trust should not and cannot be examined in isolation from each other.
The multi-dimensionality of trust facilitates our understanding of various types of trust identified in the literature. Among them, the most widely quoted distinction is between calculative and affective trust (e.g., Huemer 1998; Lewis and Weigert 1985; McAllister 1995; Wicks, Berman and Jones 1999; Williamson 1993). Calculative trust rests on a logical and rational calculation of likely outcomes of future collaboration compared to alternatives. Such trust is chiefly motivated by a value-adding collaboration with resource complementarity and reputation effects (Larsson, Bengtsson, Henriksson et al. 1998). Affective trust occurs because an emotional bond is created between people, enabling them to transcend rational predictions, to take a “leap of faith” that trust will be honoured (Lewis and Weigert 1985). This could be pure trust with beliefs that the exchange partner will always perform positively and take care to avoid harming you. Calculative and affective dimensions of trust are interrelated and mutually relevant to interfirm relationships.
There is another typology of trust presented in literature, according to which trust is conceptualized as collections of emotions that are felt together about the other party (Young 2001), in other words, trust is understood as a compound emotion (Millenson 1967). In the literature, trust has been described in terms of liking and admiration (Swan
16 and Nolan 1985; Tyler and Krammer 1996), respect (Jackson 1985), faith (Zaltman and Moorman 1988), acceptance (Bonoma 1976) and confidence (Eriksson and Hallen 1995). Emotions are inextricably linked but not all emotional combinations are equivalent to trust (Young 2001). The core of trust as emotions is the cognitive and affectual responses to the evaluation of other and self (DeRivera 1984). In light of this, this conceptualization, which envisages trust primarily by its emotional properties, parallels and helps explain the affective basis of trust. The salient emphasis on trust as emotions calls for awareness of the interaction between rational and emotional elements in trust in business relationships. Rational calculus and emotional attitudes interact with each other to construct the overall nature and structure of trust. Further, the result of such interaction could affect firms’ decision making in business relationships. Despite the claim that human beings are the most emotional animal of all, Jonah Lehrer (2009) reveals that we still need to take the time, sometimes, to consciously and rationally think through a decision, because our emotions could be misleading. He shows how emotions and feelings like trust emerge from the unconcious parts of our brain, which stem from internal processing of information, and “argue” with the conscious, rational parts of the brain to affect the decisions we make. Thus the emotional and calculative aspects of trust become intermingled.
Antecedents and consequences of trust in business relationships have been on the research agenda for many researchers in the past decades. However, the extensive research has not yielded a coherent and integrated literature concerning the relationship between trust and other variables (Geyskens, Steenkamp and Kumar 1998). Many researchers have taken the view that trust is fostered primarily from experience of relationships in the past (e.g., Ganesan 1994; Kramer and Tyler 1996; MacMillan, Money and Downing 2000) that include whether or not a firm has kept its commitments, been honest, and not taken any opportunistic actions. In addition to this view of reputation having strong effects on trust, other antecedents to trust include environmental uncertainty (e.g., Achrol and Stern 1988; Dahlstrom and Nygaard 1995; Kumar, Scheer and Steenkamp 1995), types of dependence (e.g., Anderson and Narus 1990; Ganesan 1994; Geyskens, Steenkamp and Kumar 1998), communication and cooperation (Anderson and Weitz 1989; Anderson and Narus 1990; Morgan and Hunt 1994) and relationship outcomes (Frazier 1983; Kumar, Scheer and Steenkamp 1995).
17 Table 2.1 presents a summary of major studies that identify the origins of organizational trust in business relationships.
Trust plays a central role in relationship building, development and maintenance. In general, the two major kinds of benefits that trust is believed to be able to bring to a relationship are economic benefits (e.g., Eccles 1981; Hirsh 1976; Sako 1992) and social benefits (e.g., Argyle 1991; Granovetter 1985). In particular, trust is positively related to the purchase decision and the selection of a partner (Doney and Cannon 1997). When a business relationship is set up, the trust fostered between partner firms in the relationship helps to reduce the decision-making uncertainty in managing the relationship (e.g., Morgan and Hunt 1994), enhances the level of cooperation (e.g., Anderson and Narus 1990; Deutsch 1960; Pruitt 1981), increases the functionality of conflicts (e.g., Anderson and Narus 1990; Morgan and Hunt 1994) and builds up the desire for relationship enhancement and continuity (e.g., Andaleeb, Lee and Gruneisen 1992; Anderson and Weitz 1989; Selnes 1998). Geyskens et al. (1998) conclude that satisfaction and long-term orientation are the two major outcomes of trust in business relationships. Table 2.2 summarizes findings of major studies on the consequences of trust in business relationships.
18 Table 2.1 Main antecedents of trust in business relationships
Main antecedents of trust Major studies e.g., Aulakh et al. (1996); Miyamoto et al. Commitment (2004); Gao et al. (2005) e.g., Anderson and Weitz (1989); Anderson Cooperation and Narus (1990); MacAllister (1995); Mishra (1996) e.g., Achrol and Stern (1988); Dahlstrom Environmental uncertainty and Nygaard (1995); Kumar et al. (1995) Expertise of partner e.g., Lewicki and Tomlinson (2003) e.g., Anderson et al. (1987); McAllister (1995); Mishra (1996); Nicholson, Compeau Frequency, scope and efficiency of communications and Sethi (2001); Denize and Young (2007b); e.g., John and Reve (1982); Anderson and Goal congruence Weitz (1989) e.g., Hawes, Mast and Swan (1989); Donay Liking and Cannon (1997) Organizational characteristics (e.g., organizational e.g., Moorman et al. (1993); Morgan and structure and culture) and similarity between Hunt (1994); Nicholson, Compeau and Sethi partners(e.g., business values, organizational culture) (2001)
e.g., Dwyer and Oh (1987); Mishra (1996) Participation in decision making
e.g., Moorman et al. (1993); Doney and Personal characteristics, e.g., honesty, moral integrity, Cannon (1997); Halliday (2003) expertise, reliability and affinity with trustor e.g., Anderson and Weitz (1989); Ganesan Reputation of partner (1994); Doney and Cannon (1997); MacMillan et al. (2000) e.g., Scheer and Stern (1992); Ganesan Satisfaction (1994); Kumar et al. (1995) Transaction specific investments (TSI) e.g., Ganesan (1994) e.g., Anderson and Weitz (1989); Kumar et Types of dependence al. (1995); Geyskens et al. (1996);
19 Table 2.2 Main consequences of trust in business relationships
Main consequences of trust Major studies e.g., Anderson and Weitz (1989); Morgan and Hunt (1994); Commitment Ruyter et al. (2001) e.g., Dwyer et al. (1987); Anderson and Weitz (1989); Sako Communication (1992); Mishra (1996) e.g., Deutsch (1962); Anderson and Narus (1986); Dwyer et al. Cooperation (1987); Morgan and Hunt (1994); McAllister (1995) e.g., Ganesan (1994); Selnes (1998); Zaheer et al. (2002); Desire to continue and enhance Johnson and Grayson (2005) Enhancement of external e.g., Granovetter (1985); Dasgupta (1988); Hakansson and relationships/networks Snehota (1995) e.g, Anderson and Narus (1990); Morgan and Hunt (1994); Functionality of conflict Mishra (1996); Zaheer, Lofstrom and George (2002)
e.g., Anderson and Narus (1990); Zaheer, McEvily and Level of conflict Perrone (1998); Childers, Ruekert and Boush (1984)
e.g., Dahlstrom and Nygaard (1995); Kumar (1996); Doney and Performance Cannon (1997) Reduced cost and stakeholder well- e.g., Dixon and Wilkinson (1986); Sako (1992) being Reduced uncertainty e.g., Morgan and Hunt (1994); McAllister (1995) Relationship stabilization e.g., Ring and Van de Ven (1994; 1992)
Resource allocation and investment e.g., Anderson et al. (1987); Nielson (1998); Fang et al. (2008)
Satisfaction e.g., Halliday (2003); Morrow et al. (2004)
20 2.2.3 Research gaps The review of major studies of trust in business relationships has unveiled important understandings of trust as a key behavioral feature of interfirm relations with a longer- term orientation, aspects that used to be overshadowed by more short-term transaction focused economic theory. Extensive research has been conducted in the past decades along with efforts to conceptualize trust in business relationships. Most of this research provides variable-focused correlational type explanations in terms of statistical relationships between trust and other variables. This has not ended up with a coherent and integrated literature (Lewicki and Bunker 1995), especially regarding the origins, processes, dynamics and effects of trust.
Take commitment in business relationships as an example. Some researchers argue that commitment helps to breed trust (e.g., Selnes 1998; Walter, Helfert and Mueller 2000), while others contend that the existence of trust leads to higher level of commitment (e.g., Kwon and Suh 2004; Ruyter, Moorman and Lemmink 2001). In another example, Johnson and Grayson (2005) found empirical evidence supporting a significant and positive relationship between performance-based trust and affective-based trust. However, Rodriguez and Wilson (1995) reported that affective-based trust did not affect performance-based trust in an individualist culture, whereas it did in a collectivist culture.
The lack of empirical consistency leads to a remarkable diversity in the understanding of trust in business relationships, which could indicate the richness and complexity of trust. One way of explaining the diverging findings reported in studies of trust could be that trust might be measured and tested at different stages of relationships, which represent different contexts where trust exists. As Anderson and Narus (1990) point out, “when asked about their perceptions of their firm’s trust in a working relationship, informants give a present state report; that is, they answer on how much their firm trusts the partner firm at the current point in time” (p54). This shows that timing could be a critical element in explaining why trust is as it is now in a relation, therefore, researchers need to account for it when understanding trust in business relationships. It further indicates that the relationship between trust and its influencing factors is not transparent and linear but complex and precarious. Thus, trust in business relations
21 should not be treated as a variable with predetermined antecedents and consequences. Instead, it should be conceived of as a theme (Halliday 2003) or an experience (Young 2006), a dynamic phenomenon that involves a development process with feedback effects in which it affects and is affected by various factors at different times in relationships. Efforts to understand trust without being aware of its dynamic nature are similar to a blind man describing his own small piece of the elephant.
It is recognized that as a business relationship evolves, the level of trust changes (Dwyer, Schurr and Oh 1987; Ford 1980a; Ring and Van de Ven 1994) as does the nature of trust (Huemer 1994; Lewicki and Bunker 1995). Yet sadly, the majority of research on trust in business relations is comparatively static with the research focus placed more on structures than on processes. Although it is known that trust rarely emerges by itself, there has been little research examining the specific processes through which trust is created and changes over time. Most researchers fail to acknowledge that trust is a changing and evolving experience where values, attitudes and emotions all operate simultaneously to produce the overall state (Wicks, Berman and Jones 1999). Given this, despite the heavy amount of interest and value placed on research on trust in business relationships in the past decades, its dynamics remains an under-theorized, under- researched, and therefore poorly understood phenomenon (Child 2001).
David Wilson is one of the pioneer researchers incorporating spatio-temporal contexts in understanding trust. He contends that trust could have an active phase at early stages of business relationships, when partners are being selected and relationship purposes are being defined, but trust could be latent later in the relationship during the process of setting relationship boundaries, creating relationship value and maintaining relationships (Wilson 1995). In addition, Doney and Cannon (1997) identify five distinct processes by which trust can develop in a business relationship, which manifest the dynamic nature and contextuality of trust. In their theory, the calculative process is rooted in the economics literature, which suggests that trust development primarily involves firms calculating the costs and/or rewards of partners cheating or staying in the relationship. The prediction process of developing trust depends on firms’ ability to forecast their partners’ behavior, which indicates that trust grows when two parties share a variety of experiences and consequently develop their capability of predicting
22 each other’s behavior in the future. The capability process focuses on the credibility and ability component of trust, where partner firms evaluate and determine each other’s competence and capability to meet obligations. The intentionality process involves perceived benevolence or willingness, the interpretation of words, behaviors and attempts of partner firms to identify each other’s intentions in exchange and other activities. Finally, trust can develop through a transference process where a third party’s definition of a partner firm is used as a basis for defining the trustworthiness of that firm. This implies that trust can be transferred from a trusted “proof source” to another firm with which the trustor may have little or no direct experience (Milliman and Fugate 1988).
These two studies on the dynamics of trust have shed light on how trust plays different roles and follows different developmental paths along with relationship evolution. However, they have shortcomings. Wilson’s work is a thinking piece exclusively based on an extensive literature review. Doney and Cannon’s research is empirical yet grounded on a cross-sectional study, thus, losing the insights that could have developed by looking at a more complete process of relationship development over time. As Wilson argues, many of the variables are active at some stages and become latent in others.
Being aware of the knowledge gaps in the area of interorganizational trust, the research to be reported in this thesis studies the dynamics of trust and its interactions within business relationships. The basic orientation in this research can be summarized by Jantsch (1980):
This new understanding may be characterized as process oriented, in contrast to the emphasis on “solid” system components and structures composed of them…The notion of system itself is no longer tied to a specific spatial or spatiotemporal structure nor to a changing configuration of particular components, nor to sets of external or internal relations. Rather, a system now appears as a set of coherent, evolving, interactive processes (p6).
23 Viewing the system as “undivided wholesome in flowing movement” (Bohm 1980, p11), my research aims to conceptualize the dynamics of trust and explain it by identifying the underlying mechanisms that drive the evolutionary process of trust in business relationships. Trust is shaped by a variety of environmental factors involving individuals and firms, local and broader social norms and other features of relevant social structures (Wicks, Berman and Jones 1999). The nature and magnitude of trust changes as interaction with the other and the environment goes on. Trust develops over time when cooperating firms act and interact in business relationships.
The research questions and objectives arising from this account of the gaps in the research literature are as follows.
Research questions o What are processes and determinants of the dynamics of trust in business relationships? o What are the underlying mechanisms that drive the dynamic process of trust in the relationship development?
Research objectives o To develop an analytical framework for understanding the dynamics of trust in business relationships o To identify underlying mechanisms that drive the dynamics of trust along with the relationship evolution
24 Chapter 3 Literature Review (Part II) ---Theories of organizational change and mechanisms
Researchers have described the dynamics of trust in different ways. Among them, Lewicki and Bunker (1995) argue that trust is a dynamic phenomenon, while Wicks, Berman and Jones (1999) call it a conditional good which is continuous and socially embedded. The literature review, described in the previous chapter, of major studies of trust in business relationships in the past decades, reveals that the majority report findings about the connections between trust and other variables are based on cross- sectional analysis. Little attention has been given to trust as a complex and dynamic concept sensitive to the context in which it exists and the processes by which it develops. To fill this knowledge gap, my research aims to take a contextual, processual and historical approach to conceptualize the dynamics of trust and to identify underlying mechanisms that drive the evolution of trust in business relationships.
An analytical framework will be proposed in the next chapter as a starting point for the field research. In this chapter theories of organizational change and the role of mechanisms are examined, because these guide the development of the framework and the kind of explanation of trust evolution sought. The discussion of mechanisms is largely based on the literature of sociology and other sciences, where the idea of mechanism-based explanations is better accepted and more developed and practiced than in marketing (for an exception see Buttris and Wilkinson (2005)). Thus one significant contribution of this thesis is to introduce this literature with its associated concepts and methods to the marketing literature. By reviewing major literatures on mechanisms, I will present an approach in which the concept of mechanism plays a central role in explanation. This sets the ground on which I can move on with field research to identify the underlying mechanisms that explain changes in trust in business relationships.
3.1 Theories of organizational change Business relations and networks are quasi-organizations (Hakansson and Snehota 1995) in which the emergence of cooperative relationships is a form of organizational change and innovation. The content of such relationships reflects the basic elements of social
25 organization including collective goals, functional differentiation and interdependency as well as integrated actions (Reve and Stern 1979).
Divergent views exist in the literature, borrowing theories from various disciplines, to explain how and why organizations change. These views include stages of growth, processes of decay and death, population ecology, chaos theory, complexity theory and many others. Being aware that such diversity of theories “often encourages compartmentalization of perspectives that do not enrich each other” (Van de Ven and Poole 1995, p510), Van de Ven and Poole (1995) combine the interdisciplinary contributions into a framework where four generic types of process theories are introduced to explain why and how changes take place in social and biological entities. These theories are life cycle, teleology, dialectics and evolution. These four theories of organizational development and change have distinguishing characteristics in that they view process as a different pattern of changes governed by different generative mechanisms. They are briefly reviewed in the following, with the key characteristics of these theories presented in Table 3.1.
26 Table 3.1 Process Theories of Organizational Development and Change
Life Cycle Teleology Dialectic Evolution
Key Organic growth Purposeful cooperation Opposition and conflict Competitive survival Metaphor
Logic Immanent program Envisioned end state Contradictory forces Natural selection among competitors Prefigured sequence Social construction Thesis, antithesis, synthesis in a population Compliant adaptation Equifinality
Event Progression
Recurrent, discontinuous sequence Recurrent, discontinuous sequence of Linear and irreversible sequence of Recurrent, cumulative and of goal setting, implementation and confrontation, conflict and synthesis prescribed stages in unfolding of probabilistic sequence of variation, adaptation of means to reach desired between contradictory values immanent potentials present at the selection and retention events end state beginning
Generating Prefigured program/rule regulated Goal enactment Conflict and confrontation between Population scarcity by nature, logic or institutions opposing forces, interests or classes Competition Force Commensalism Source: adapted from Van de Ven and Poole (1995)
27 The life-cycle approach conceptualizes change and development as a predetermined process of organic growth in which organizations proceed in a unitary sequence of stages. According to this theory, the developing entity has an underlying form, logic or program within it that regulates the process of change. Though external environmental events and processes may influence changes in organizations, “these external factors are always mediated by the immanent logic or rules that govern the development of organizations” (Van de Ven and Poole 1988, p37). The teleological approach explains development and change by assuming that purpose or goal is the final cause guiding movement of an organization. In this perspective, organizational entities are considered as purposeful and alert but are able to learn and adapt to changing circumstances in internal and external environments. Therefore, process is viewed as “a repetitive sequence of goal formulation, implementation, evaluation, and modification of goals based on what was learned or intended by the entity ” (Van de Ven and Poole 1995, p516).
The dialectical approach to organizational change implicitly assumes that an organizational entity exists in a pluralistic environment where colliding forces or contradictory values exist and compete with each other for domination and control. These opposing forces can be internal when the organization has several interest groups competing for priority. Also, oppositions can be external when the directions the organization pursues are in collision with those of other organizations. In this theory of dialectics, stability and change are explained by reference to the balance of power between opposing entities. The key processes are that of thesis-antithesis-synthesis whereby positions invoke counter-positions by others that lead to a result that stems from their interactions and power. The fourth theory, the evolutionary approach, explains changes as a recurrent, cumulative and probabilistic progression resulting from the processes of variation, selection and retention of organizational entities. An emphasis is placed on the environment as the principal motor of change, acting as a selecting force retaining only those entities that best fit its evolving nature. But the links between the environment and organisations are not just one way. Organisations co- evolve and shape the environment of each other. At the same time, organizations co- evolve with the environment.
28 In the literature on business relationships, the main theories that have been adopted to explain relationship development are theories of life cycle and teleology. Ford (1980a) contends that a business relationship develops following a pre-relationship stage, an early stage, a developmental stage, a long term stage and a final stage. In a similar spirit, Dwyer, Schurr and Oh (1987) apply a marriage metaphor to divide a business relationship into stages of awareness, exploration, expansion, commitment and dissolution. Ring and Van de Ven (1994) regard cooperative relationship development as a process consisting negotiation, commitment and execution stages, each of which is assessed in terms of efficiency and equity. These stage models are based on an organic metaphor in which the life of a business relationship is divided into a sequence of stages through which relations are assumed to progress or end. Other models adopt the teleological approach which assumes that a relationship develops through purposeful construction driven by formulation and adaptation of goals by powerful actors or leaders. In keeping with a firm focused on marketing management approach the firm is assumed to be more or less in charge of its relations. For example, Wilson (1995) introduces an integrated model of buyer-seller relationships with stages of partner selection, defining purpose, setting relationship boundaries, creating relationship value and relationship maintenance, all of which give primacy to the focal firm and its goals. However, relations involve multiple actors and multiple goals interacting.
Though the stage models of business relationship development, based on life-cycle and teleological theories, recognize changes in business relationship development, they are of limited use because these models are strictly linear and sequential and make unwarranted assumptions about the discretionary power of a focal firm. The life-cycle approach assumes that relationship development is some rigid unfolding process, in which subsequent stages are predetermined from the start. This is in opposition to the reality where phenomena in the social world barely follow straightforwardly separate stages (Pajunen 2005). As argued by Gerald Edelman (2006), a Nobel Prize winner in Medicine, there is no precise clock governing the outputs of our brains no matter how regular they may appear. By the same token, there is no logic to have any predetermined paths for business relationships to follow in their development. A relationship may terminate without any climax of expansion or a long term stage, as suggested by life- cycle models.
29 The teleological approach is free from the theoretical defect of predestination, yet it has its own deficiencies. This approach implicitly assumes that a business relationship is controlled by one firm that can manage the relationship over time to achieve its own purposes as planned. In reality, a business relationship develops as a result of joint efforts by partner firms throughout their actions and interactions between each other. Therefore, the focus should be management in relationship, instead of management of relationship (Wilkinson and Young 2001).
These shortcomings seem to be addressed by the dialectic approach, which focuses on the process of change in terms of the interaction among competing groups. However, this theory also provides limited power in explaining the underlying sources of change. The focus of thesis vs antithesis is more on conflict and competition but firms not only compete but cooperate as well. In recent years, the concept of co-opetition in business markets has been advanced to describe the situation when firms compete and cooperate simultaneously (Bengtsson and Kock 2000; Brandenburger and Nalebuff 1996). It is harder, if not impossible, to draw a clear line between competitors and collaborators that a firm is related to, indicating an increasingly complicated network where the firm exists. Hence, the interaction between competing firms in conflict is no longer the only effective force that drives changes in a business relationship.
Evolution is powerful and opportunistic, but it is neither intelligent nor instructionistic (Edelman 2006). The indeterminant nature of evolution requires the explaining theory to emphasize that the future is constructed rather than designed (Aldrich 1999). The evolutionary approach, as defined by Van de Ven and Poole (1995), is believed to provide an appropriate theoretical lens to understand and interpret changes in business relationships. Firstly, it provides a generic framework which focuses on actions and interactions between various actors, rather than the intentions of actors. Secondly, it explains changes by not only examining consequences but also the processes in which changes are being produced. An evolutionary approach can be viewed as incorporating the other processes as components affecting variation, selection and retention but it is much more sensitive to the role of the environment in driving changes and to co- evolutionary forces. Last but never the least, the evolutionary model does not specify
30 the engines driving variations, selection and retention. The power of the theory of evolution can be strengthened when ideas from other approaches are integrated to explain how changes occur and under what conditions, such as organizational learning theory, resource dependence and transaction cost economics (Aldrich 1999).
In the business literature, the works by Aldrich (1999) and Van de Ven and Poole (1995) characterize the evolutionary approach as comprising four generic processes: variation, selection, retention and diffusion. Variation concerns the mechanisms by which new forms of relations emerge over time, due to chance factors or intentional design. Selection is the process by which internal or external forces support, develop or undermine new forms. Retention refers to the way selected forms are preserved or reproduced over time. Diffusion is the process by which new forms are adopted or duplicated by others in the relevant population. These processes are inter-related and together shape the pattern of evolution of business relationships.
Evolutionary theorists introduced the term coevolution to describe situations in which organizations not only respond to influences from their environments, but also affect their environments (Baum and Singh 1994; Roughgarden 1983). In business relationships, the coevolutionary process is realized through coupled feedback loops among the structure, interaction processes and outcomes, as well as experiences of those engaged. Many paths of development are possible, depending on initial conditions, the history of interactions and the impact of external events. As history unfolds, some events will turn out to be important turning points (Abbott 2001) or tipping points (Gladwell 2002) that redirect the paths of evolution in critical ways.
The evolutionary approach is adopted as a theoretical basis for this research as an overarching framework (Aldrich 1999) within which the value of the life-cycle, teleological and dialectical approaches can be recognized and appreciated. The four motors representing these theories are nested within and complementary to each other (Poole, Van de Ven, Dooley et al. 2000). When the context of business relationship development changes over space and time, any single motor of change is inherently incomplete, and more than one motor could come into play. The motors of change may operate simultaneously or in sequence at different times. When functioning
31 simultaneously, these motors could reinforce or contradict one another. Such connection and interactions among life cycle, teleology, dialectics and evolution imply that any theory of business relationship development is a composite of more than one such ideal- type motor of change (Poole, Van de Ven, Dooley et al. 2000).
There is no general agreement on what an acceptable process and mechanism based explanation should look like, but in order to be explanatory, theories must provide at least partial answers to why and how events happen, why things change over time and why states or events co-vary in time or space (Hedstrom 2005). This indicates the central role of mechanisms in explanations and urges researchers to search for mechanism-based explanations that describe propositions about probabilities of different outcomes conditional upon general ceteris paribus clauses (Gibson 1983). Mechanisms have been widely discussed and explored in sociology, biology, chemistry and other sciences. In the following section, I review the major literature on mechanisms in various disciplines, which has helped to shape and hone my understanding of what mechanisms are and how mechanisms operate. As I will show, it is not always clear in the literature exactly how to identify and differentiate different mechanisms operating at different scales and intensities. Thus another contribution of this thesis is an attempt to show how mechanisms can be identified using temporal case analysis.
3.2 Mechanisms In the literature, particularly sociology, three genres of explanations may be identified, offering different types of answers to questions of why and how changes happen over time. These are covering-law explanations (e.g., Hemple 1965), statistical explanations (e.g., Goldthorpe 2000) and mechanism-based explanations (e.g., Bhaskar 1976). The covering-law explanation claims that scientific explanation is essentially a logical inference based on one or more given scientific laws and antecedent conditions (Rohrlich 1994). Such explanation indicates that science consists of a search for a universal law to explain events and links between variables, but the major debate about covering law involves whether it can be used generally in explaining human behaviors (D'Andrade 1986) because context specific characteristics can affect how things work
32 out. Statistical explanations are the most widely applied. They take a probabilistic view of causation that are identified and tested through statistical techniques. However, this genre of explanation is accused of being of a descriptive and deterministic kind to explain the complicated non-deterministic world. Both covering-law and statistical explanations are argued to have failed to capture the essence of explanation because they do not involve the notion of a mechanisms (Bunge 2004). This leads to the position of mechanism-based explanations as the most appropriate type of explanation for the social sciences (Gibson 1983; Hedstrom 2005). The core idea behind the mechanism approach is to explain not by identifying universal laws or statistically related factors, but by specifying underlying mechanisms that show how phenomena are brought about (Hedstrom 2005). In short, mechanisms are the workhorses of explanations (McAdam, Tarrow and Tilly 2001), attributing causal power that moves beyond superficial descriptive accounts of processes (Stinchcombe 1991).
An example of mechanisms is introduced by Stuart Glennan (1996) to explain the regulation of the water level in a tank. A float is attached to a lever which opens and closes an intake valve. When the lever is down, the intake valve is open, allowing pressurized water to fill the tank. When the lever is raised to a certain level, the intake valve closes to stop the flow of water. The float is heavy enough that in the absence of water it will pull the lever down, opening the intake valve. On the other hand, it is sufficiently buoyant that the rising water level will force the float up, closing the intake valve when water reaches the fill point.
In this example, a float valve can be called a mechanism, however, the operation of this mechanism involves a number of parts, including the tank, the valve, the pressurized water source, the lever and the float. This shows that a mechanism is not a single object but consists of a combination of defining features that are jointly sufficient to activate that mechanism (Pajunen 2005). Elster (1989) uses a metaphor that describes mechanisms as the nuts, bolts, cogs, and wheels that link causes with effects. Hernes (1998) describes mechanisms as “a set of interacting parts—an assembly of elements producing an effect not inherent in any one of them” (p74), whereas Machamer, Darden and Craver (2000) define them as “entities and activities organized such that they are productive of regular changes from start or set-up to finish or termination conditions”
33 (p3). McAdam (2001) and his colleagues define mechanisms as “a delimited class of events that alter relations among specified sets of elements in identical or closely similar ways over a variety of situations” (p24). More recently, Hedstrom (2005) characterizes mechanisms as consisting of “entities with their properties and the activities that these entities engage in, either by themselves or in concert with other entities...a constellation of entities and activities that are organized such that they regularly bring about a particular type of outcome” (p25). These major definitions, coupled with others in the literature, are summarised in Table 3.2.
Table 3.2 Major definitions of mechanisms
Author Definition Bechtel and Abrahamsen A mechanism is a structure performing a function in virtue of its (2005) component parts, component operations, and their organization. The orchestrated functioning of the mechanism is responsible for one or more phenomena. Campbell (2005) Mechanisms are the processes that account for causal relationships among variables. Craver (2001) Mechanisms are entities and activities organized such that they are productive of regular changes from start to finish Elster (1989; 1998) A mechanism explains by opening up the black box and showing the cogs and wheels of the internal machinery. A mechanism provides a continuous and contiguous chain or causal or intentional links between the explanans and the explanandum. Mechanisms are frequently occurring and easily recognizable causal patterns that are triggered under generally unknown conditions. Glennan (1996) A mechanism underlying a behavior is a complex system which produces that behavior by the interaction of a number of parts according to direct causal laws. Hedstrom (2005) Mechanisms consist of entities with their properties and the activities that these entities engage in, either by themselves or in concert with other entities...a constellation of entities and activities that are organized such that they regularly bring about a particular type of outcome. Hedstrom and Swedberg A social mechanism is a precise, abstract, and action-based explanation (1998) which shows how the occurrence of a triggering event regularly generates the type of outcome to be explained. Hernes (1998) Mechanisms are a set of interacting parts—an assembly of elements producing an effect not inherent in any one of them. Little (1991) A causal mechanism is a series of events governed by law-like regularities that lead from the explanans to the explanandum. Machamer, Darden and Mechanisms are entities and activities organized such that they are Craver (2000) productive of regular changes from start or set-up to finish or termination conditions. McAdam, Tarrow and Tilly Mechanisms are a delimited class of events that alter relations among (2001) specified sets of elements in identical or closely similar ways over a variety of situations. Stinchcombe (1991) A mechanism is a piece of scientific reasoning which gives knowledge about a component of another, ordinarily higher-level theory.
34 Though mechanisms are described in apparently different languages, these definitions are consistent with each other in terms of their agreement on the essential features of mechanisms, which can be summarized in three aspects.
Firstly, mechanisms are composed of actors and activities that constitute mechanisms by their functional roles and regularity of patterns. Actors have specific types of properties such as structures, attributes, orientations and locations. These properties enable actors to engage in activities which are producers of change (Machamer, Darden and Craver 2000). Activities can be actions taken by an actor, or interactions occurring between and among actors. For example, in economics, market is considered as a concrete system composed by people and fruits of labor, whose central mechanism is the exchange of goods and services conducted by people using their fruits of labor (Bunge 2004).
Actors must be appropriately located, structured and oriented for the mechanism to operate, while activities, likewise, should be understood in their spatiotemporal location involving a temporal order, rate and duration (Sayer 2000). The same entities and activities, strung together in different spatial and temporal relations to one another, could yield different mechanisms (Craver 2001). As explained by Harvey (1963), the heart’s size is appropriately related to that of the vena cava and that of the aorta such that it delivers blood in regular volumes to distal regions of the body within a specific range of rate and pressure. Besides, the heart is situated between the vena cava and the pulmonary artery on one side and between the pulmonary vein and the aorta on the other. Such spatial arrangement of component parts determines what mechanisms to be identified to explain the movement of heart and blood.
The second essential feature of a mechanism is that it is a continuous process in a concrete system that is capable of causing or preventing changes in a system (Bunge 1997). Mechanisms are a sequence of prototypical events that involve actors and activities. The effects of an event on the process are determined by the spatiotemporal context of its occurrence, i.e. when the event occurs and how it is related to other events. Mechanisms reflect particular progressions of events and their conjunction with other events and conditions. The order, rate and duration of successive events are crucial for
35 identifying and understanding mechanisms. Therefore, mechanisms should be described in a systematic statement of connections, contexts and chronicle links between and among events (Poole, Van de Ven, Dooley et al. 2000). An example to illustrate the processual feature of mechanisms is found in Craver (2001) which explains mechanisms for the blood circulatory system. Blood entering the heart through the vena cava is then pumped through the pulmonary artery to the capillaries of the lungs, where oxygen and carbon dioxide are exchanged. Blood returns to the heart via the pulmonary vein before being shipped off to the rest of the body. In this example, the mechanism involves a sequence of stages from beginning to end, the order of which is impossible to change. This shows that timing is crucial for mechanisms and learning a mechanism’s timing provides important clues to how it works and to how it does not work (Craver 2001).
Another interesting example can be drawn from biology as introduced by Bunge (2004). Charles Darwin explained biological evolution in terms of inheritance with modification and natural selection. The inborn modification turns out to be arising from genetic mutations and recombinations, which are in turn explained in molecular terms. The focus on genes leads to a redefinition of evolution as a change in the frequencies of certain alleles in a population, which is an effect of the alterations occurring in the course of individual development. This process is identified as mechanisms resulting in changes in developmental pathways, or roots of speciation, as recognized by the science of evolutionary developmental biology (Wilkins 2002).
The third essential feature of a mechanism is its multiplicity, i.e. there is a nested hierarchy of mechanisms. As explained by Craver (2001), an item X can be said to be at a lower level than an item Y if X is one of the actors or activities of the mechanism that regularly bring about the type of Y-related outcome in consideration. Individual actions are at a lower level than social phenomena (Hedstrom 2005). However, a social phenomenon may also be conceived to be at a lower mechanism level than actions if such phenomenon is a component of the mechanism for those actions. The best-known typology of mechanisms that reflects such multiplicity is from the work by Hedstrom and Swedberg (1998), based on the macro-micro-macro model developed by Coleman (1986) to conceptualize collective social actions. According to Hedstrom and Swedberg, researchers trying to explain social phenomena try to establish how macro-level events
36 or conditions affect the individual, how the individual assimilates the impact of these macro-level events, and how a number of individuals generate macro-level outcomes through their actions and interactions. Such a theory naturally ends up with a typology of mechanisms which include situational mechanisms as macro-micro mechanisms, action-formation mechanisms as micro-micro mechanisms and transformational mechanisms as micro-macro mechanisms (Hedstrom and Swedberg 1998). Figure 3.1 summarizes these macro-micro-macro types of social mechanisms.
Figure 3.1 Typology of three types of social mechanisms
Situational Transformational Mechanisms Mechanisms (Type 1) (Type 3)
Action- Formation Mechanisms (Type 2)
Source: Hedstrom and Swedberg (1998). Social Mechanisms: An Analytical Approach to Social Theory
In addition to the macro/micro linkage model of mechanisms developed by Hedstrom and Swedberg (1998) as discussed above, other classifications of mechanisms have been proposed. McAdam and his colleagues (McAdam, Tarrow and Tilly 2001) suggest environmental mechanisms, cognitive mechanisms and relational mechanisms to explain social and organizational movements. Environmental mechanisms refer to how external factors affect actors’ capacities to engage in changes. Cognitive mechanisms are those which alter how actors perceive their identities, interests and possibilities for change. Finally, there are relational mechanisms which affect how actors and their networks are connected so that they are able to produce changes. In addition, Hedstrom (2005) introduces desire-based, belief-based and opportunity-based mechanisms (DBO theory) to explain actions and interactions between actors. This typology is apt for making sense of how the social situations that accommodate actors
37 are likely to influence actors’ beliefs, desires and opportunities, and how actors, acting alone or together on the basis of these beliefs, desires and opportunities, bring about various intended and unintended outcomes (Hedstrom 2005).
The notion of mechanism levels indicates the connectedness and interaction between and among mechanisms. Mechanisms seldom operate on their own but instead, they concatenate with others into broader processes to explain observable changes (Gambetta 1998). Sometimes these mechanisms work together, while other times they may counteract one another.
The actor-based, spatiotemporal, processual and hierarchical characteristics of mechanisms mean that mechanisms cannot be reduced to a list of variables which cooperate consistently and uniformly over time to produce changes. A mechanism underlying changes is a system that enacts changes by actions and interactions of one or more actors through space and time. A description of mechanisms should depict actors and their properties and activities that link them together, showing how activities at one stage affect those at successive stages.
It may be expected that every time a phenomenon explained by a particular mechanism occurs the mechanism will have occurred. And when the mechanism is operating, a familiar outcome might be expected. However, this may not happen. We may not see the operation of an identified mechanism when a phenomenon, which is supposed to be explained by the mechanism, takes place. Likewise, we may not observe the outcome suggested by the mechanism though the mechanism is operating. This can be explained by two main reasons. Firstly, mechanism-based theories aspire to explain but not predict (Davis and Marquis 2005; Elster 1998). A classic example is given by George Vaillant (1983) that “perhaps for every child who becomes alcoholic in response to an alcoholic environment, another eschews alcohol in response to the same environment” (p65). As analyzed by Elster (1998), two mechanisms are identifiable to explain these reactions, i.e. doing what your parents do and doing the opposite of what they do. “We cannot tell ahead of time what will become of the child of an alcoholic, but if he or she either turns out to be either a teetotaler or an alcoholic, we may suspect we know why” (Elster 1998, p45). This example represents a usual situation that though we know actors will respond
38 to a particular environment, we are not certain in what direction the response will take place because social outcomes are emergent phenomena affected by a complex system involving situational factors and individual factors as well as the interrelatedness between them. Small and seemingly unimportant changes in actors may have profound consequences for the social outcome that is likely to emerge (Hedstrom 2005). In light of this, identified mechanisms would empower researcher to explain changes afterward, yet not predict prospectively (Davis and Marquis 2005).
The second reason is that social phenomena are generally the result of several different mechanisms operating simultaneously (Hedstrom 2005). This is related to the early argument that mechanisms rarely work on their own to produce the observed changes. Rather, they work together through influencing, interacting with and even counteracting one another. In cardiology, the activities of the circulatory system are instantiated by the heart’s pumping of blood, the kidney’s filtration of the blood, and the venous valves’ regulation of the direction of blood flow (Craver 2001). In brain science, it is the interaction of the various systems in the core that is critical, and researchers must be careful to avoid assigning consciousness to a specific region (Edelman 2006). By the same token, researchers in social science need to consider several mechanisms simultaneously in order to explain a specific social phenomenon (Gambetta 1998). And because these mechanisms may interact with each other in complex and unpredicted ways, researchers should describe mechanism-based explanations as propositions about the probabilities of different outcomes conditional upon general ceteris paribus clauses, i.e. providing theoretical statements about empirical tendencies but not about actualities (Gibson 1983; Mill 1844).
In conclusion, the mechanism approach provides a direction for more productive theoretical work to explain social phenomena. Its prospects in the social sciences are thought to be promising, yet there is an apparent lack of agreement on how researchers could actually identify and examine mechanisms (Pajunen 2008). This may explain why there is no systematic mapping of mechanisms existing in marketing. In particular, there is no great example of mechanisms available to explain dynamics of trust in business relationships. Little (1998), Steel (2004) and George and Bennett (2005) proposed process tracing as a suitable way for the identification of mechanisms. The research
39 reported in this thesis will pursue this line of thinking by adopting temporal case analysis to discover generative mechanisms underlying the dynamics of trust. In the following chapter, a conceptual model will be introduced and explained as the first step for the field study.
40 Chapter 4 Conceptual Model and Propositions
A business relationship is a living thing that is continually being and becoming. As firms learn and adapt to each other and to their environment, which includes other connected relations as well as more general environmental factors, the structure and nature of trust between partner firms are shaped, evaluated and adjusted. This is a continuous and cyclical process that has feedback effects on the way firms act and interact in business relationships.
As a complex and adaptive entity, a business relationship operates based on its structure. Structure refers to how the parts of a system are organized and interrelated (Wilkinson 1990). It emerges as a property of the interactive system rather than in a top-down, managed and directed fashion (Holland 1998). We can distinguish two types of structures in business relationships, operating structure and governance structure. The former refers to the types of organizations and connections among them that enable organizations to behave and perform activities that constitute the interactive process in the relationship (Alderson 1965), while the latter involves factors that govern, control and coordinate these activities, including economic control such as contracts (Williamson 1993) and social control such as power, trust, authority and reciprocity norms (Hakansson and Johanson 1988; Larson 1992). Operating and governance structures are intertwined and interactive, which collectively generate the evolutionary dynamics of both the relationship as a whole and the firms involved in it (Dagnino, Levanti and Destri 2008). While structures shape ongoing processes, they themselves are affected by these processes as firms continuously adjust structures in order to seek harmony with the environment (Alderson 1965). A conceptual model is proposed in this chapter as a stepping stone to investigate the dynamics of trust in a business relationship. As suggested by Lewicki and Bunker (1995), in order to understand the dynamics of trust, researchers need to work out a framework of relationship dynamics. Miles and Huberman (1994) distinguish two types of frameworks, one being tight and prestructured, the other loose and emergent. The latter makes good sense when the research is to explore understudied phenomena or very complex social phenomena as the former could “blind the research to important features in the case or cause misreading of local informants’ perceptions” (Miles and 41 Huberman 1994, p16). Following this advice, a conceptual model is proposed in this thesis showing the interactions between firms as well as between operating and governance structures, thus linking trust development to relationship development. It will guide the research process but does not determine what to find. The model defines a way of seeing, where to look and what kind of factors may be relevant to look for (Pajunen 2005), but discoveries cannot be planned in advance (DuBois and Gadde 2002). In light of this, this research consists of an interplay between induction and deduction.
Figure 4.1 presents the conceptual model where trust is depicted as arising as a result of experience, the nature and content of which can shift or change over time. The model describes an iterative cycle of how trust evolves in a dyadic business relationship through the interactions taking place within the relationship as well as the external environment. Interactions among those involved in a relation are a major driver of the model. It also includes the notion of time, an element that is not explicitly incorporated within the IMP’s interaction approach (Hakansson 1982). This inclusion allows for the incorporation of temporal attributes of relationship development, such as breakpoints and cycles, which have been lacking in process-based relationship development models (Halinen and Tornroos 1995).
The prior history of business relationships that firms have experienced matters in shaping the initial conditions of how firms trust each other when relationships are established. These conditions change and develop over time throughout the interactions taking place in focal and connected relationships. Firms co-evolve by learning and adapting to the experience and outcomes of their actions and interactions in an environment over time. The outcomes of such interactions include cognitive, perceptual and emotional changes in firms that revise the structure of trust in the relationship, which in turn has feedback effects on a firm’s future actions and interactions. The relationship reaches a dynamic equilibrium or balanced state if the patterns of actions and interactions occurring reproduce the governance and relational structures, including beliefs and intentions. A relationship is continually being tested and challenged by the ongoing interactions taking place and the experiences and outcomes for those involved as well as by environmental changes and shocks.
42 In the following sections, the conceptual model is explained in greater detail. Propositions related to initial conditions of trust are developed, followed by those that explain the evolution of trust in conjunction with ongoing relationship development. Causal mechanisms are not directly indicated in the model. They are embedded in the links between different elements and are to be in part discovered through the case studies. However, the relevance of various types of causal mechanisms is suggested in the following discussion as they emerge from analyzing trust dynamics.
43 Figure 4.1 The evolution of trust in interfirm relationships
External Environment External Environment
Outcomes for Outcomes for Firm A Interaction Firm B
Differences Differences
Actions of Actions of Firm A Firm B Expectations Expectations of Firm A of Firm A
Resources of Resources of Firm A and Firm Firm A and Firm B B History of History of Firm A Nature and Firm A degree of trust History of History of --AB Beliefs of Firm B Firm B Beliefs of Firm A Firm B --BA
Intentions and Intentions and goals of Firm A goals of Firm B External Environment External environment 44 4.1 Initial conditions A fundamental feature of a business relationship as a complex evolving system is dynamism, indicating a sense of “life” within it which emerges, forms and reforms throughout constant interactions, similar to the cycle of birth and death (Capra 1996). The constant change leads to a further characteristic of a business relationship, which is its sensitivity to initial conditions. Evolution is constrained by initial conditions which affect the orientations and perceptions of parties involved and consequently, the potential patterns of development (Triandis 1995; Welch and Wilkinson 2004) as well as the role and importance of personal and social relations (Yeung and Tung 1996). In this research, “initial” is used to mean when parties first meet or interact for formal cooperation (McKnight, Cummings and Chervany 1998).
Trust, as a means of coping with uncertainty by reducing perceived risk, can be of a calculative or affective nature, based on a trusted firm’s credibility (e.g., Anderson and Weitz 1989; Dwyer, Schurr and Oh 1987; Sako 1992) and benevolence (e.g., Andaleeb, Lee and Gruneisen 1992; Anderson and Narus 1990; Ring and Van de Ven 1992) respectively. The initial trust in a new business relationship can be viewed as “placed trust” (Halliday 2003) in that it is not built in concrete experience of cooperation between partner firms but is an initial response to the knowledge and observation of potential partners’ competence and motive. To be specific, the initial conditions of trust are largely affected by the effects of the prior history of the parties involved, which are reflected in the resources possessed by both firms, self-perception and beliefs about the partner, as well as their intentions and goals for the relationship.
A firm experiences internal evolution in conjunction with the development of business relationships in its history. A firm may have gained new resources out of a relationship or had its original resources maintained, changed or lost. Later in a business relationship, the firm is different from the one when the relationship first starts, comprising new bundles of resources. Therefore, the current repertoire of resources that a firm possesses is shaped by the path it has travelled (Teece, Pisano and Shuen 1997). Given the lack of hands-on experience of cooperation, the initial trust largely derives from a trusted firm’s resources needed by a trusting firm. Firms evaluate the value of existing resources possessed by potential partners to determine their capability and build confidence in them, which sets the ground on which initial trust could be built.
45 Resources cannot be evaluated in isolation, as their value is determined by the context in which they are to be used. A resource that is valuable in one industry or at a time might fail to be the same value in a different industry or chronological context (Collis and Montgomery 1995). Further, the resources of a firm influence its perception of itself and beliefs in its potential partner. The self-perception of a firm includes the knowledge of its own resources and the interpretation of their value, which helps the firm to decide what resources to seek in business relationships, thus impacting their evaluation of the resources possessed by potential partners. In addition, a firm’s value system determines which types of behaviors, events and people are desirable or undesirable in business relationships (Wicks, Berman and Jones 1999). Stereotyping (McKnight, Cummings and Chervany 1998) could function at this stage as a mechanism explaining the initial building of trust between partner firms. Stereotyping means that firms are placed into a general category, for example, based on their nationality, ethnicity and culture. By positive stereotyping, a firm can quickly form positive trusting beliefs about another firm by generalizing from the favorable category into which the trusted firm is placed. The final selection and acceptance of partners indicates firms’ confidence in the resource complementarity and value congruence between the firms, on which the initial trust in partner firms is built.
But the belief in a partner firm is not only based on resources possessed by both firms. It may develop through what a firm has experienced and observed in prior relationships that involve the partner. Previous relationship experiences produce carryover effects through the memory traces they leave in the people and firms involved such as personal relationships and trust (Havila and Wilkinson 2002) as well as a firm’s market reputation such as fairness and credibility (Anderson and Weitz 1992; Ganesan 1994). Evidence that a peer firm’s performance in cooperation has been consistent with norms of reciprocity, fairness and commitment is vital in assessing its trustworthiness (McAllister 1995). This is termed “reputation categorization” by McKnight, Cummings and Chervany (1998), meaning that firms assign attributes to another based on second- hand knowledge about the other. At the inception of a business relationship, the effects of reputation categorization have significant influence on a firm’s initial beliefs about its partners, thus, impacting the initial conditions of trust. Therefore, it can be regarded as another type of mechanism for trust dynamics.
46 The resources of a firm include technological, financial, reputational, structural, institutional and market assets (Teece, Pisano and Shuen 1997), as well as the competence and skills embedded in the people, teams, relations and networks comprising the firm (Wilkinson and Young 2005b). Some of them are visible, while others are tacit. Since the learning of tacit skills does not typically take place before the alliance is initiated (Iyer 2002), it is easier for a firm to observe and evaluate visible and measurable resources such as size of organization and brand reputation. Therefore, such resources are likely to play a more important role in developing a potential firm’s confidence, hence, affecting the building of initial trust.
The above arguments are summarized in the following propositions.
Proposition 1a: The history of business relationships affects the resources firms possess, which influence the building of initial trust in a business relationship.
Proposition 1b: With a lack of concrete experience of interactions between cooperating firms, the visible and tangible resources have a stronger impact on the conditions of trust at the inception of a business relationship.
Proposition 2a: A firm’s beliefs in a partner firm, based on its resources and prior history of business relationships, impact the conditions of trust at the inception of a business relationship.
Proposition 2b: A firm’s self-perceptions of its own resources and value system impact its beliefs in a partner firm.
The shadow of the past is also visible in terms of the intentions and goals that firms initially set for a new business relationship. The extant literature has proposed that the creation of trust can be rooted either in the anticipation of something forthcoming (e.g., Lane and Bachmann 1998; Vansina, Taillieu and Schruijer 1998) or on common past satisfactory experiences (e.g., Gulati 1995; Luhmann 1979; Zucker 1986). However, I argue that past, present and future are not isolated stages in history but connected parts in an evolutionary continuum. Firms are attracted to a new relationship by the
47 anticipated benefits such as access to a new market or new technology. What they have experienced, learned and observed in prior experiences, together with their existing resources and beliefs, affects what firms expect from their partners and what they hope to achieve out of new relationships. For example, the ambition of becoming an active participant in a relationship or not could be decided by the firm’s perception of its position in the relationship (Gadde, Huemer and Hakansson 2003) as well as the perceived importance of its partner. The goals for a business relationship could include both economic benefits and non-economic satisfaction, even the ambition of controlling and influencing (Gadde, Huemer and Hakansson 2003). The intentions and goals that a firm sets at the inception of a business relationship affect the firm’s inclination to place trust in its partner, thus, impacting the initial conditions of trust. This leads to Proposition 3.
Proposition 3: A firm’s intentions and goals for a new relationship, affected by its existing resources and beliefs, have impacts on the conditions of trust at the inception of the business relationship.
4.2 Ongoing relationship processes: production and reproduction over time The initial trust is more driven by rationally derived costs and benefits (Lewicki and Bunker 1995; Shapiro, Sheppard and Cheraskin 1992). Rational evaluation of perceived costs and benefits is a type of mechanism underlying choice and response. The initial trust does not have to be built but is an initial response to a partner firms’ prior expertise and reputation (Halliday 2003), yet it does need to be maintained. Nothing is given once and for all; there is always some space for change in business relationships (Johanson and Mattsson 1987). The process of how the initial trust is being maintained is embedded in the ongoing process of relationship development, which produces different contexts where changes in trust occur. The initial conditions of trust guide the actions firms take, given the behavioral expectations of each other, and influence how resources, actors and activities are tied (Hakansson and Snehota 1995) at the beginning of a business relationship. However, realities happen in interactions (Abbott 2001), which are fundamental processes driving relation dynamics and involve a number of mechanisms. The actual outcomes and 48 experience of interactions over time depend on internal and external interaction processes. Internal processes include feedback mechanisms taking place within the relationship that support or not the development of cooperative norms. External interaction processes refer to interactions among connected relationships that reinforce or undermine focal relationship process (Anderson, Hakansson and Johanson 1994). Internal and external processes are themselves linked as external events may trigger changes within a relation and vice versa.
Firms are more likely to start with small actions as a type of experimentation in a new business relationship to assure themselves that things are under their control (Langer 1975) and to test the initial beliefs about partners. As the relationship continues to grow, more interactions and relationship experiences occur, which allow a more comprehensive assessment of partner firms. As firms accumulate more knowledge related to competency, benevolence and integrity of partner firms, trust changes and becomes direct knowledge-based (Holmes 1991) and more complex in its nature. This is now discussed in more detail.
Various kinds of exchange take place as relationships develop, including product or service exchange, information exchange, financial exchange and social exchange (Ford 1997) and such exchanges are further examples of mechanisms at work. Bonds of various kinds are developed through these exchange activities such as technical, planning, knowledge, socioeconomic and legal bonds (Johanson and Mattsson 1987). Firms interact and develop business and personal ties, whereby they learn about each other and adapt their perceptions and behaviors in the relationship. As a result, resource ties, actor bonds, activity links and schema couplings are formed and revised.
The potential value of a business relationship comes from the way the relation recombines resources to reveal new possibilities, including both opportunities and threats, that could not be seen or dealt with by firms working independently (Wilkinson and Young 2005b). Realization of such potential values depends on how well the firms involved learn and adapt to each other in a mutually beneficial way through the complementary resources brought into the relationship and the enhanced value co- created in the relation (Gadde, Huemer and Hakansson 2003). As more explicitly stated
49 by Huemer (2004b), relationship learning is a prerequisite for partner firms to engage in any meaningful resource exchanges.
Learning is a fundamental cognitive mechanism. Learning in business relationships has been conceptualized as a process of acquiring, disseminating, interpreting, using and storing information across organizations (Mohr and Sengupta 2002). Learning takes place about many aspects of the relation including the relationship environment, relationship tasks and how to perform them successfully, the process of cooperation and partner’s skills, goals and motives (Doz 1996). Summarized by Hakansson and Johanson (2001), three types of relational learning can be distinguished. Firstly, firms learn skills and procedures necessary to enhance collaborative advantages. Secondly, firms learn how to coordinate activities in the relationship and across relationships. Thirdly, firms learn things that are partner-firm specific, such as partner firms’ needs, resources, strategies and business contexts (Johanson and Vahlne 2003a). These types of learning take place concurrently as firms interact in a business relationship.
Learning is initiated at the beginning of a new relationship. Mutual yet not necessarily identical learning occurs when interactions between firms are intensified as the relationship unfolds and develops. Firms learn about differences as well as complementarities between themselves. They also learn how to adapt to meet the needs of each other better so as to coordinate resources of both firms more effectively and enhance their own capability of understanding and coping with the changing environment (Wilkinson and Young 2005b). In short, learning enables each firm to increase its knowledge and experience not just of the interaction but of the characteristics and expectations of its partner (Ford, Hakansson and Johanson 1986) as well as the relationship itself.
The outcomes of learning can be reflected in partner firms’ psychological and behavioral adaptations. Adapting is an important mechanism in the dynamic process of business relationships (Axelsson and Easton 1992; Hakansson and Sharma 1996; Hallen, Johanson and Seyed-Mohamed 1991). It brings initial fit between the needs and capabilities of firms involved in a relationship but is also necessary in an ongoing relationship when firms are exposed to changing business conditions and experiences, which reveal new opportunities and problems. The existing processes, routines and
50 procedures that firms originally possess and operate may be selected and retained, or adapted and modified. Relationship norms are constructed through such mutual adaption of partner firms and are reinforced or undermined through the firms’ application of their resources and strategies.
Hallen, Johanson and Seyed-Mohamed (1991) suggest that adaptation is a means to develop trust especially in the early stages of a business relationship. This could be because out of the processes of learning and adaptation, partner firms act and respond to an environment, which leads to events occurring that generate changes in firms’ resources, perceptions and beliefs, as well as the intentions for the relationship. Changes in these aspects, in turn, give rise to changes on the structure and magnitude of trust in the relationship.
As a relationship develops, resources are combined in different ways when firms learn and adapt, act and interact to respond to the changing environment. The results of these processes have feedback effects on perceptions and the mix of firms’ resources. Some existing resources may be selected, modified, retained or even discarded, while at the same time, new resources could be grown such as knowledge and learning capability (Wilkinson and Young 2005b). Changes in collaborating firms’ resources affect their evaluation of the value of resources possessed by partner firms, hence, revising the conditions of trust placed in partner firms. This discussion is summarized in the next proposition.
Proposition 4: As a business relationship develops, a firm’s resources change due to the learning, adapting and interacting taking place in the relationship. As a result, the nature and extent of trust between partner firms changes over time.
Each firm’s behavior and performance are noted and monitored by the other and measured against their expectations (Narayandas and Rangan 2004). As a result, firms adjust their beliefs in themselves and their partners in terms of capability, benevolence and integrity. For example, each time an outcome meets expectations, positive beliefs in partner firms will be fostered and reinforced. By the same token, an outcome that fails expectations will damage a firm’s belief in its partner. While firms adjust their self- perception and beliefs in their partners through learning and interactions, they are also
51 developing organizational mindsets regarding belief in the value added of forming such business relationships (Doz and Hamel 1998). This indicates a sensemaking process (Weick 1995) whereby firms accumulate knowledge and integrate it into a whole that “make sense” of a situation. As a result, firms integrate, adjust and reintegrate their knowledge, memories and experiences into some understanding and views of themselves, their partners and the relationships. Changes in these beliefs lead to revised conditions of trust placed in the partner firm. This is the basis for Proposition 5.
Proposition 5: As a business relationship develops, a firm’s beliefs in itself, its partner firm and the value of the relationship change due to learning, adapting and interacting taking place. As a result, the nature and extent of trust between partner firms changes over time.
When firms continually learn and interpret each other’s behavior and evaluate performances and outcomes in interactions, they are also determining intentions and goals for the relationship (Lindskold 1978). Based on their evaluations, firms continue to adjust early objectives and form new ones, which allow the relationship to change in its content and scope over time. The iterative process between expectations and relationship goals is thus evident, leading to the emergent nature of objectives in business relationships (Möller and Wilson 1995). As argued by Hakansson and Sharma (1996), the results of business relationships can be rather unexpected because they will be the result of the processes taking place over time more than the ambitions at the moment the relationship begins. Adjusted intentions and goals for the relationship affect firms’ inclination to place trust in their partners to continue and develop the relationship, which affect the chances of changes in the conditions of trust in the relationship.
Proposition 6: As a business relationship develops, a firm’s intentions and goals for the relationship change due to the learning, adapting and interacting taking place. As a result, the nature and extent of trust between partner firms changes over time.
Alderson (1965) suggests that learning and adaptation are internal processes that enable firms to reach a new harmony with the environment to achieve survival. Firms use their existing resources to seek relationship benefits and develop and adapt their manner of interaction based on what they have learned in the relationship. Firms may also use the
52 relationship to build new relationships and develop others in the network. Outcomes are uncertain, as they are based not only on the actions of the firms but on the reactions of partner firms and the happenings in connected relations. Through their actions and experiences, firms adjust their expectations and understandings of the appropriateness and effectiveness of their actions, which in turn triggers new rounds of learning and adaptation that may improve the efficiency of future strategies or lead to a declining cycle of dissatisfaction that results in firms’ searching for new partners. Adaptation may include negative resistance and produce destructive outcomes for relationship development.
It is possible that learning may not necessarily lead to further adaptation in business relationships as a relationship matures. For example, a firm familiar with its partner firm after years of cooperation is less likely to change its perceptions of the partner’s competency by one or two mistakes made by the partner firm. Likewise, the belief in the partner firm’s competency will not be always enhanced by the successful performance of the partner firm in the relationship. Hence the nature and degree of trust may not vary despite the ongoing interactions between firms. Another kind of mechanism is indicated in the form of diminishing returns to trust from individual experiences as the relation matures. Some kind of dynamic equilibrium might become established in which trust levels are maintained over time. It does not mean that interacting, learning and adapting have terminated but that the patterns and outcomes which these processes produce and reproduce are more regular and consistent, thus, being less likely to generate changes in firms’ resources, beliefs and intentions to revise the conditions of trust in the relationship. As both firms learn more about each other and are able to understand and predict the other’s behaviors better, they internalize the patterns produced out of interactions more into their own actions (Lewicki and Bunker 1995), thus, establishing recognizable and persistent organizational and relational forms (Young and Wilkinson 2004). In brief, the equilibrium is an ongoing balance produced in a dynamic process of interaction, learning and adaptation in the relationship.
Proposition 7: As a business relationship matures, trust can reach a dynamic equilibrium whereby its nature and extent does not vary with ongoing interactions but remains stable over time as the interacting, learning and adapting in the relationship produce and reproduce a particular level and kinds of trust.
53 As a business relationship develops over time, trust becomes more direct knowledge- based, i.e. it is more solidly grounded on the first-hand knowledge firms gain through hands-on experiences of cooperation in the relationship. It is impossible to foresee how stronger or weaker trust becomes as the relationship moves on, along with the changing intensity and scope of interactions between partner firms. However, it is argued here that the nature of trust will get more comprehensive and complicated with calculative and affective trust coexisting and interacting with each other. The continuing of interactions signals the relation is meeting at least basic requirements of those involved and thus a reinforcing and building up of trust over time.
The process of relationship development could be marked by the bonds created between firms at a functional level (e.g., economic, legal and technical) and experiential level (e.g., commitment, power) (Möller and Wilson 1995). This indicates that more opportunities may be discovered and acted on based on knowledge and resources gained in the relationship in which trust can be developed, compared to the situation at the inception of the relationship. Business interactions could be intensified to deliver and increase business benefits to partner firms (Dwyer, Schurr and Oh 1987). In addition, socialization could begin and become an important type of activity in order to build and develop trust (Huemer 2004a). As a result, social distance could be reduced (Ford 1980a) and relationships could become more personalized with a touch of emotion (Young 2001). On the other hand, conflicts and problems, or even crises, may take place at any time during a relationship. Some researchers have pointed out that the existence of trust has a positive effect on partner firms’ response to conflicts and crisis. For example, trust will facilitate more open communication during crisis (Mishra 1996), encourage individuals and groups to be more cooperative in their behaviors (Ouchi 1981) and generate suggestions for change focused on the problem itself (Hackman and Oldham 1980). In turn, crises are occasions for partner firms to show competence (March 1981) and commitment (Webb 1994). Therefore, the problem-solving and crisis-management process represents another important occasion where trust can be developed or undermined.
At the inception of a business relationship, the very limited interactions between firms influence the fostering of initial trust, which is more likely to be of a resource-based
54 calculative nature, driven by partner firms’ interest in the economic benefits to be achieved in the relationship. As the relationship unfolds and grows, the scale and scope of interactions enhance, which provide more opportunities for partner firms to experience and learn about each other in different settings. As a result, calculative trust can be complemented by affective trust, leading to the co-existence of the cognitive and emotional elements of trust in business relationships. Further, calculative and affective trust will interact with each other, adding to the complexity of trust development and its role as a governance mechanism in business relationships.
This linking of calculative and emotional bases of trust is consistent with developments in cognitive science that challenge the depiction of the human mind as a well of perpetual conflict between reason and emotion, where good judgment relies on using rational thought to overcome the impulsiveness that would otherwise lead us astray (Lehrer 2009). As scientists break open the mind’s black box with the latest tools of neuroscience, they are discovering that the mind doesn’t work to make decisions either rationally or emotionally, but the best decisions are a finely tuned blend of both feeling and reason. And the precise mix depends on the situation (Lehrer 2009). Emotions or feelings arise from deeper cognitive processes in the brain, which we are not conscious of, but which represent digested and integrated histories of experiences and perceptions. These result in emotions that “argue” with the more calculative rational parts of the brain to reach decisions, similar to the way the two kinds of trust interact. While prior research has reported that cognition-based trust is more superficial and emotion-based trust is more complex and enduring (Johnson-George and Swap 1982; Lewicki and Bunker 1995), it is more important to notice that trust of different natures could be playing different roles and be of different importance in driving relationship development at different phases and in different relationship contexts.
Proposition 8: As a business relationship develops, the nature of trust will become more complex. Cognition-based calculative trust will be complemented by emotion- based affective trust. In turn, these types of trust co-exist and interact to drive relationship development.
A business relationship is continually being challenged by the environment in which it operates. Whether the relationship remains the same, changes or ends partially depends
55 on the challenges it faces. A business relationship can terminate at any time (Tornroos 2004). But even though trading may stop, the relationship energy in the form of a new combination of resources, personal contacts, bonds and goodwill may not be necessarily destroyed but conserved and ready to be exported to and reactivated in future and other relationships (Havila and Wilkinson 2002). Firms may have gained new resources out of the ended relationship or had its original resources augmented, changed or lost. Resource ties and actor bonds built up through the ended relationships could shape how firms respond to subsequent relations. Activity links in the form of social interaction may still continue, offering potentials for a subsequent re-emergence of the relation. Interpersonal relationship, reputation and trustworthiness built in the ended relationship may be reserved or even develop after the relationship termination. Schemas, ideas and plans are similarly shaped over a relation’s history and influence schemas in other relations.
The history of a relationship matters in shaping its current conditions and context as well as its future history. Path dependence plays a key role not only in terms of starting conditions but in shaping the way future conditions and experiences are interpreted and adapted to (North 2005). As firms co-evolve in their relationships, they are different from what they were when a relationship first began. This affects their attractiveness and trustworthiness as partners in future potential business relationships. Path dependence is not a mechanism in itself but draws our attention to the cumulative nature of the learning and adapting effects of the experience and outcomes of interactions in a relation over time.
Proposition 9: When a business relationship terminates, the combination of resources a firm has developed through the relationship influences the initial conditions of trust in future business relationships.
In conclusion, the conceptual model suggested in this Chapter depicts a basic picture of how trust may evolve in a business relationship. It is proposed that trust evolves as firms constantly change their resources, beliefs and intentions as a result of ongoing actions and interactions in a business relationship. The nature of trust gets complicated as a relationship develops, when emotion may emerge and be integrated with cognition to influence firms’ evaluation of each other, leading to the co-existence of and
56 interaction between calculative and affective trust. Trust may reach a stable level as a relationship matures, when the experience and outcomes of actions and interactions produce regular patterns and creation of new knowledge of each other ceases.
57 Chapter 5 Methodology
This chapter is concerned with the methodology used to investigate the phenomenon of the dynamics of trust in business relationships. As Yin (2003) points out, a research design is “a logical plan for getting from here to there, where here may be defined as the initial set of questions to be answered, and there is some set of conclusions (answers) about these questions” (p20). The path that leads to the destination is chiefly determined by the nature of phenomenon under consideration (Pandza, Polajnar, Buchmeister et al. 2003).
The research question for the present study is how, not if, changes occur in interfirm trust in conjunction with relationship evolution. This encourages a choice of methodology that has the same flexibility and dynamism as the focus of interest in the study (Nummela and Welch 2006). Further, the nature of this question requires concentration on a contemporary set of events within a real-life context (Yin 2003) to capture a dynamic process in both temporal and spatial contexts. In light of this, a case study using event sequence analysis is considered as an appropriate research strategy.
Details of the implementation of the research strategy are reported in this chapter. It will proceed like this. Firstly, a comparison of variance and process approaches in marketing research, especially studies of organizational change and process, is presented as the epistemological ground on which the study can be carried out. Following that, an explanation of the research strategy is provided. In the third section, a research design, including details of data collection and analysis, is reported.
5.1 Variable-based variance approach vs. event-based process approach in marketing research As summarized by Poole and Holmes (1995), three definitions of process have been used in the literature: 1) as a logic explaining causal relationships between independent and dependent variables; 2) as a category of variables pertaining to actions and activities of individuals or organizations; 3) as a narrative describing a sequence of events on how things develop, change and unfold. When the first two definitions are followed, process is typically studied with a “variance theory” (Mohr 1982) of change that explains
58 process in terms of relationships among independent and dependent variables as examined statistically. This is an outcome-driven approach (Aldrich 2001) that builds explanations from an awareness of observed outcomes to prior causally significant conditions. The third meaning of process takes an event-driven approach (Aldrich 2001) associated with a “process theory” to explain the temporal order. Sequences of events take place based on a historical narrative (Abbott 1988; Pentland 1999; Poole, Van de Ven, Dooley et al. 2000; Tsoukas 2005) and the understanding of how changes occur is achieved by narrating the temporal sequence of events that unfold in an institutional arrangement (Van de Ven and Poole 2005).
The variable-based variance approach (VA) and event-based process approach (PA) share the common objective of constructing representations of social phenomena from evidence (Ragin 1997), yet they yield distinct conceptualization of process and change, and imply quite different underlying assumptions. The VA has been the dominant approach in studies of organizational change and evolution (Van de Ven and Poole 2005). It has been accepted as “the standard for how academic scholars will agree that a finding is a fact” (Gartner and Birley 2002, p387). However, as pointed out by Poole, et al. (2000), “while the variance approach offers good explanation of continuous change driven by deterministic causation, this is a very limited way to conceptualize change and development. It overlooks many critical and interesting aspects of change processes” (p29). This observation is shared by many other scholars who argue that the variables paradigm parses social reality into fixed entities with variable qualities and could blind us to important phenomena that can only be discovered by diversifying our formal techniques (e.g., Abbott 1990b; Pettigrew 1997; Ragin 1997; Stevenson and Greenberg 1998). In the following section, a comparison of variance and process approaches is presented by examining the distinct underlying assumptions of these methods. These are summarized in Table 5.1.
59 Table 5.1 Comparison of variance and process approaches
Variance Approach Process Approach Fixed entities with varying attributes Entities participate in events and may change over time Explanations based on necessary and sufficient Explanations based on necessary causality causality Explanations based on efficient causality Explanations based on final, formal and efficient causality Generality depends on uniformity across Generality depends on versatility across cases contexts Time ordering among independent variables is Time ordering of independent events is critical immaterial Emphasis on immediate causation Explanations are layered and incorporate both immediate and distal causation Attributes have a single meaning over time Entities, attributes, and events may change in meaning over time Source: from Poole, et al. (2000, p.36)
The variance approach emerges from a particular view of science that can be described as Newtonian in nature, characterized by objective rational linear thinking as well as simple cause and effect (Ryan 2006). Following this direction, the variance approach seeks explanations of process in terms of independent variables causing changes in a dependent variable. The underlying causal process that generates the outcome is presumed to operate continuously over time, which indicates the assumptions upon which the VA is based. Firstly, this approach assumes “constant relevance” (Abbott 2001) that treats entities as fixed in their meanings and effects on others, independent of spatiotemporal context where the entities exist and operate. Secondly, the VA assumes a “monotonic causal flow” (Abbott 2001) that causal effects generally run in one direction only. Main effects are given primacy, with interaction and feedback effects in which dependent and independent variables may swap roles are not considered (Buttris and Wilkinson 2006). Thirdly, the VA is essentially atemporal, assuming that the order of things or events does not influence the way they turn out. This means that the more causally powerful attributes are the same across cases and that the particular observed sequence of attributes over time does not influence their ultimate result (Abbott 2001). The absence of sequence effects in the VA leads to its fourth assumption that extended
60 narratives or accounts engaging long sequences of actions are not required for a valid explanation, since the effects of the past that matter in the present are represented in the immediate past state of the entity (Van de Ven and Engleman 2004). The possibility of long term effects of prior history that are reflected at later points in time is not considered by the variance approach.
The variance approach has been dominant in marketing research. In particular, it has played an important role in studies of organizational change and evolution. However, its underlying assumptions reveal an essentially static perspective, leading to a limited understanding of causal conditions and lack of examination of multiple conjunctural causation (Ragin 1997). Actors (entities) may change roles, grow, merge, separate or even cease to exist (Abbott 2001) as outcomes of interaction among each other, and as responses to a changing environment. The nature and amount of influence of an entity on others as well as how the influence works depend on the context in either space or time. When the variance approach excludes the effects of spatiotemporal contexts from understanding the influence of entities and observed outcomes, it could obscure our views and understanding of actual processes taking place.
The event-based process approach, as an opposition to the variance approach, emerges from the awareness that “the clockwork version of the world is unraveling and the tapestry of the world as a dynamic interwoven web is taking form” (Goerner 1999, p13). It is similar to the variance approach in that both seek to develop general explanations, though the criteria for generality are sharply different. The process approach adopts a belief that causality is not unilateral as we are faced with a locally unique complex of interacting factors (Miles and Huberman 1994). Unlike the variance approach, the process approach emphasizes the contextual effects and seeks explanations that tell a narrative story about how a sequence of events unfolds to produce a given outcome. Guided by this direction, the first assumption of the PA is that the social world consists of fluctuating entities. The demographic, sequential and interactive structure of reality indicates that it is not a steady and fixed state but a dynamic process, thus, denying the need to presume a perpetual meaning and importance of attributes or events (Abbott 2001). The meaning and value of an entity vary with historical time and the context of other entities. This contextual view of reality taken by the PA redefines the world in terms of evolving central subjects that make events happen and to which events occur
61 (Abbott 2001; Abbott 1988). Given this, explanations hinge on discerning essential central subjects as well as the types of events and their characteristics that mark changes in these subjects (Van de Ven and Engleman 2004). Secondly, the PA deliberately makes order and sequence effects central, assuming that the order in which causal forces come to bear is critical in narrative accounts. As put by Levinson (1978), events “do not in themselves cause the start or end of a period” (p55). Instead, it is the timing of the event that determines its perceived significance and potential to influence further changes. “What happens, how it happens, why it happens, what results it brings about, is dependent on when it happens, the location in the processual sequence, the place in the rhythm of events characteristic for a given process ” (Pettigrew 1997, p339). Such observations point to the important effect of order and sequence in defining the meaning of events and understanding outcomes. This assumption of the PA implies that history cannot be encapsulated in the immediate past of the entity, as contended in the VA. Rather, we need a chain of events that link antecedents and consequences (Einhorn and Hogarth 1986) to show how the complete sequence of events has resulted in a causal history. It is possible that extremely minor events at one point of time can have large consequences at later points because of their location in the sequence, which are structures referred to as turning points (Abbott 2001).
While the variance approach is able to provide good explanations of continuous change in the language of a variable-based general linear model, it offers only a limited way to conceptualize change and development because it ignores critical aspects of changing processes (Poole, Van de Ven, Dooley et al. 2000). Compared with the variance approach, the process approach tends to be more complex with its focus on actors acting, the sequences of events occurring over time as well as the way they are causally interconnected (Abell 1987). It incorporates different types of effects into explanations, including contextual influence, feedback effects, critical events and tipping points, as well as causal factors that influence the sequencing of events (Van de Ven and Poole 2005). In light of this, the components of a causal map from a processual perspective are of a different nature to a disembodied beta coefficient. They are not probabilistic but specific and determinate, grounded in understanding the events over time in the concrete local context (Miles and Huberman 1994). This is also the world of a manager, immersed in their local reality, coping with and responding to specific events and contexts over time. (Wilkinson 2008).
62 Social and business life happens in an unfolding sequence of events and people that are embedded in networks of interacting and interdependent actors (Buttris and Wilkinson 2006). This indicates that the reality of change and evolution will not be appropriately understood when it is only viewed as a set of variables. Association among variables does not necessarily imply causality when all included variables are treated as equally salient regardless of the particular circumstances when these variables operate. There is a need to include the complexity of interpretations and representations. The event-based process approach addresses the complexity of events, the need to account for temporal connections among events and different time scales in the process. Therefore, this approach makes it possible to go beyond a surface description to the logic behind observed temporal progressions, hence, providing a richer and more realistic understanding of actual processes.
The purpose of the present study is to develop a process theory of the dynamics of trust and to identify the underlying generative mechanisms of trust in business relationships. Thinking in terms of mechanisms offers a fresh framework for addressing many traditional philosophical issues including causality, explanation and change (Machamer, Darden and Craver 2000). As discussed in Chapter 3, a mechanism is viewed in this study as a series of activities of entities that enact the developing path through space and time (Machamer, Darden and Craver 2000; Poole, Van de Ven, Dooley et al. 2000). It is composed of processes influenced by interactions in a given context. Given this understanding, the nature of the present study is about a sequence of individual and collective events unfolding over time in business relationships. The identification of generative mechanisms relies on the recognition of temporal sequences of unfolding events (Emirbayer 1997; Mahoney and Rueschoemeyer 2003; Pierson 2004) as well as the contingencies where these events occur. In light of this, the event-based process approach’s emphasis on the effects of spatiotemporal contexts in generating real explanatory power makes it a more appropriate lens than the variance approach to see into the dynamics of trust in business relationships.
63 5.2 Research strategy The epistemological foundation of the process approach adopted in the present study leads to further consideration of a research strategy as a practical guide to implementing the empirical research. The process approach utilizes all methods, including quantitative methodology, to make sense of change and development processes. However, the processual and contextual logic in the process approach requires an incorporation of time and context as two key elements in the research strategy. This places restrictions on the type of data that should be used and the nature of the model that can be employed, hence, influencing methodological choices (Poole, Van de Ven, Dooley et al. 2000).
Durkheim (1956) once claimed that only history can show us “what elements the present is formed, on what conditions each other depends, how they are interrelated; only history, in a work, can bring us to the long chain of causes and effects of which the present is the result” (p152). Oden (1989) takes a step forward by realizing that time could also be viewed as having different levels simultaneously, where the pace of change could be different. According to her, in addition to the traditional way of seeing history as made up of short movements, time could be at a level in which changes happen in cycles, such as economic cycles, or only the slow, almost unchanging evolution of something takes place, such as climate or language. Halinen and Tornroos (1995) voice their contention regarding time with a specific concern for studies of business relationships. In their view, the present moment can only be understood in terms of its history and its future in that social and business events take place in time between different actors who have histories, present surroundings, values, as well as future expectations and goals. A sound theory of business relationships must take these dimensions of time into account, which indicates that a methodology for studying business relationships, especially studies of processes of change and evolution, has to be considered from a temporal perspective.
History can be viewed not only as path-dependent action sequences but also as a context in which the observed phenomenon takes place (Stryker 1996). Context is a frame that surrounds the event being examined and provides resources for its appropriate interpretation (Goffman 1974; Goodwin and Duranti 1992). It is crucial for understanding changes and processes, since causes always have a context. To know the former we must understand the latter (Gaddis 2002). Contexts can be historical, i.e. in
64 relation to other temporal modes such as the past and the future. Contexts can also refer to different levels of analysis including psychological, structural, cultural, social and relational settings. Contexts at different levels coexist and are connected to shape a socially constituted, interactively sustained and time-bound phenomenon (Goodwin and Duranti 1992). For example a business relation comprises contexts beyond the relation, the supra systems in which it is embedded, including business networks and cultural dimensions, as well as subsystem levels such as individual firms and people. Events at all these levels interact to produce the outcomes we can observe. A focal event or phenomenon cannot be abstracted from contexts, therefore, contexts play a critical role in determining what to see and discover. However, context is not a set of factors that statically surround phenomena. Rather, it is being shaped as much as it shapes the focal phenomenon. There is a reflexive relationship between context and the phenomenon that it helps to generate. Furthermore, such a relationship emerges and changes through time and space (Goodwin and Duranti 1992).
The aim of this research indicates the highly contextual nature of the research which involves multiple levels of analysis including organizational actor, relationship and external environment. The identification of mechanisms is only possible through the investigation of contexts of and the sequence and connection between events. Given this, a variable-centered research strategy using cross-sectional studies is not considered as appropriate. However such an approach could play a role as a complement to process research by examining relations between variations in contexts and the interrelation of variables representing aspects of process identified by process research. But this necessarily abstracts from the specifics of individual relationship histories. An event- based narrative explanation is deemed as an appropriate research strategy for the purposes of my research. Narrative explanation, as a method, has been termed comparative narratives (Abell 1987), narrative positivism (Abbott 2001) and event structure analysis (Heise 1989). The underlying structure of these is basically the same, that the narrative explanation describes in chronological order what happened, why it happened and how it happened (Pajunen 2005). History is most often presented in narrative form (Pajunen 2004) as narrative approaches accentuate sequence-related aspects of time as pace, duration, cycle and trajectory (Aminizade 1992). The narrative approach is an effective tool for combining context, order, contingency and analytical
65 generalizability (Abbott 1992; Griffin 1993; Quadagno and Knapp 1992; Stryker 1996), which are essential parts of the examination of generative mechanisms.
Narratives are sequential accounts (Stryker 1996). Succinctly defined by Stone (1979), narrative is “the organization of material in a chronologically sequential order and the focusing of the content into a single coherent story, albeit with subplots” (p3). These stories are conceptual wholes, built through selection and chronological linkage of otherwise discrete parts, each of which takes on meaning in light of the whole (Griffin 1993). Therefore, a prominent characteristic of narratives is its “inherent” logic (Abbott 1992), which is based on the sequential connectedness and unfolding of actions (Griffin 1993) due to underlying mechanisms. Taking the form of an open-ended story, narratives are analytical constructs that provide a wealth of information, such as individual, institutional or collective actors, the actions they take, and when, where, why, how and with what consequences they take them (Orbuch 1997; Stryker 1996; Weick 1995). Thus, explicitly or implicitly, narratives provide a description of a process and encode all data relevant to a wide range of organizational phenomena (Pentland 1999).
Narratives go beyond providing description of the social world. When they embody time, space, actors, actions and events, narratives also explain why it happened as it did and not otherwise (Stryker 1996). Actors make sense of the world and give meaning to events, actions and objects (Weick 1995). They also proactively plan which enacts narratives to legitimize their actions (Pentland 1999). Narratives encourage researchers to look back retrospectively and ahead prospectively to construct an understanding of the mutually constitutive interplay of actors and structural context as well as the dynamics continuously occurring in time and through time (Abrams 1982; Giddens 1979; Sewell 1992). By producing longitudinal and contextual accounts of the history, researchers are able to tell not only when something happened but more importantly, reveal what else happened at the same time, before, or after, in order to show how events came into existence and developed (Renvall 1983). In this way, researchers are able to move from surface observations toward the underlying structure, thus, moving from description to explanation (Simon 1992).
The explanatory power of narratives also originates in the fact that narrative data are “the same kind of data that organizational members use to plan, enact, interpret, and
66 evaluate their own actions and those of others” (Pentland 1999, p717). They allow researchers to approach closely the real-life context where phenomena of interest occur, in other words, researchers are closer to the lived experience of managers who are actors in firms and business relations. In light of this, the narrative understandings are sui generis, constituting a distinctive form of explanation (Polkinghorne 1988).
A related issue to applying narratives as a research strategy to identify processes and mechanisms is the defining of events. According to Abell (1987), events are constellations of actions and interaction, i.e. what entities do or what happens to them. Entities can be many things, such as a person, an organization, an idea, a field or any social unit that changes over the course of the narrative (Poole, Van de Ven, Dooley et al. 2000). Events may differ in their temporal duration and spatial extension (Poole, Van de Ven, Dooley et al. 2000). Further, events may also propagate from one social subsection of a given level of analysis to another diffusing into otherwise autonomous sequences (Abbott 1984). The temporal and spatial scopes of events indicate that the boundaries of events cannot be easily defined. How events are individuated is important for clarifying and developing narratives explaining the change processes (Poole, Van de Ven, Dooley et al. 2000)
In summary, narratives embody sequence and time, therefore, it is naturally suited to the development of process theories and explanations with generative mechanisms (Pentland 1999). Narrative explanations accommodate both description and explanation, where description is an essential first step (Abbott 1990b). Researchers adopting narrative approaches are encouraged to “work at getting the history right…in order to be able to generalize soundly” (Tilly 1984, p79). At the center of narrative explanations are actors, actions, events and processes (Abbott 1992). The knowledge of these aspects enables researchers to address questions of the existence and classification of sequential patterns, the antecedents of these patterns and the consequences of these patterns, all of which are stepping stones to further explore questions of why there are these patterns and why we observe these antecedents and consequences (Abbott 1990a). Answers to these questions, which are made possible by the richness of narratives and their focus on the context of actions and “path dependence” (Aminizade 1992), result in the identification of generative mechanisms, an explanation of the process observed.
67 A narrative or mere process tracking approach is not the same as a causal explanation (Pajunen 2004). To go beyond the sheer description to the postulation of generative mechanisms, an application of systematic methods and explicit concepts for analyzing narratives is necessary. The following section reports in details the research methodology used in this study.
5.3 Research methodology To execute the process approach and narrative explanation strategy, in-depth case studies with event structure analysis are conducted to investigate the dynamics of trust in business relationships. This methodology allows the development of causal explanations by digging beyond the realm of the observable to understand the necessity inherent in objects (Collier 1994). This section, first of all, provides justification for choosing case studies as the research methodology. After that, details of case selection, data collection and analysis are presented.
5.3.1 Introduction of case study as the methodology According to Little (1991), studies on generative mechanisms must be constructed on the grounds of an account of the micro-foundations of the processes. This necessitates an intensive examination of particular cases (Pajunen 2005). The reliance on multiple sources of data in case study research makes it suitable for conducting research in context dependent marketing phenomena such as organizational behaviors (Bonoma 1985). Trust, as an organizational behavior, is influenced by multiple contextual factors, therefore, the dynamics of trust in business relationships can not be easily studied outside its natural setting. An “in-context” research (Marschan-Piekkari, Welch, Penttinen et al. 2004) is needed to investigate the ever-changing object of the study. Defined by Yin (2003), a case study is “an empirical inquiry that investigates a contemporary phenomenon within its real-life context, especially when the boundaries between phenomenon and context are not clearly evident” (p13). The definition by Goode and Hatt (1952) further emphasizes the holistic nature of case studies that a case study is “a way of organizing social data so as to preserve the unitary character of the social object being studied” (p331).
68 Case studies can also be particularly useful for explanatory and exploratory research in a field that we know very little about (Easton 1995; Yin 2003). Yin (2003) describes how and why questions as exploratory because such questions deal with operational links needing to be traced over time, rather than frequency of incidence. Mintzberg (1989) agrees and expresses the idea more strongly: “no matter what the state of the field, whether it is new or mature, all of its interesting research explores. Indeed, it seems that the more deeply we probe into this field of organizations, the more complex we find it to be, and the more we need to fall back on so called exploratory, as opposed to ‘rigorous’, research methodologies.” (p109).
Behind these arguments is the potential of case studies to tease out and disentangle a complex set of factors and relationships by providing rich accounts of interwoven narratives. The detailed description of the process of change enables researchers to search for patterns in the process and trace mediating steps through which causes act. Moreover, the rich in-depth narratives produced in a case study make it possible for researchers to identify different periods in the development process, including recurrent cycles and breakpoints, periods of steady development and transitioning points (Easton 1995). In short, the power of a case study to reconstruct histories over time allows researchers the opportunity to find the underlying mechanisms that shape any patterning in the observed process (Pettigrew 1997).
In summary, case studies are justified as a proper methodology for this research for three reasons. Firstly, for a study searching for explanations built on processes and generative mechanisms, it requires documenting as thoroughly as possible the temporal sequences of events pertinent to the evolutionary dynamics in business relationships. Correlational analysis and constant conjunction are not adequate (Pajunen 2005), but a case study can help with its ability to reconstruct histories with rich in-depth narratives built on multiple sources of data. Summarized by Danermark and associates (1997), case studies are well suited to developing causal explanations and exposing generative mechanisms. Secondly, case studies allow researchers to understand phenomena within their real life context. In fact, a key distinction of case-based qualitative research is its close association with the study of phenomena in their “natural setting” or “local context” (DuBois and Gadde 2002; Marschan-Piekkari, Welch, Penttinen et al. 2004; Miles and Huberman 1994). Thirdly, case studies inform existing knowledge by
69 drawing out new insights and phenomena, thus, being appropriate for theory development (Lincoln and Guba 1985).
I use a multiple-case design (Eisenhardt 1989) in order to discern and induce patterns across relationships. This method allows the development of new insights that are reliable because observations are made, replicated and compared across multiple cases (Zaheer, Lofstrom and George 2002). In the rest of this section, details are reported on how cases were selected as well as the process of data collection and analysis.
5.3.2 Case selection Selecting cases is similar to decisions made by researchers conducting multiple experiments (Yin 2003) in that each case should complement the others by replicating the findings under various conditions, or by addressing different aspects of the overall theory (Johnston, Leach and Liu 1999). The selection of cases relies on the principles of theoretical sampling (Pettigrew 1990), which suggests that cases should be selected more than for statistical reasons but on the basis of their relevance to research questions and of their ability to replicate the analytical framework that has been developed (Glaser and Strauss 1967). Further, I aim to get as much diversity into the cases in terms of contexts so as to detect possible differences and commonalities pertinent to the mechanisms underlying the emergence and evolutionary dynamics of trust in business relationships characterized by different internal and external environments (Dagnino, Levanti and Destri 2008). Contextual factors to consider include industry settings, relationship functions and ownership types.
Extensive cooperation was required from participating firms in order to get a full understanding of relationship histories. For this reason firms were approached based on personal introductions and recommendations. Six companies doing business in Shanghai, China were chosen through personal networks and recommendations. They were contacted, given a presentation of the research project and were asked to be interviewed for the research. The companies were from event management, pharmaceutical, trading, manufacturing and chemical industries.
All the companies agreed to be interviewed. The first round of interviews was conducted with a top manager from each company. In the interview, the manager was
70 asked to nominate a business relationship in which his/her company has been involved. A brief description of how the relationship began and developed over time was provided in the interview. The manager was also asked if it would be possible to recruit the partner firm into this research project. Three companies expressed a willingness to include their partner firms in the research, while the other three rejected the request.
The six relationships identified cover various areas of cooperation, including sports sponsorship, manufacturing, international trading, advertising and supply chains. The length of the relationships ranges from three to ten years. Among these relationships, four are between state-owned and foreign-owned companies, one between state-owned and private companies, and the other between foreign-owned and private companies.
Random selection of cases is neither necessary nor preferable (Eisenhardt 1989), instead, as noted, the aim is to develop a diverse sample of relations in terms of potentially relevant aspects of context. In addition, guided by the nature of the research question and the proposed theoretical framework, the specific relationship cases were selected based on three criteria. Firstly, the relationship should experience certain ups and downs, changes and transitions. In other words, it should provide a look at least some changes over time, including growth, transformation and decay (Pettigrew 1990). Though normality could be the theme in most of a relationship history, it is extreme events, critical events and deviant events that are decisive for the development of a relationship (Easton 1995). Relationships with such events could be more informative about the nature of dynamic changes in trust along with relationship evolution. Secondly, following a theory-driven principle (Johnston, Leach and Liu 1999; Pauwels and Matthyssens 2004), cases selected should represent different conditions in terms of how the relationships are initiated as this is likely to have important effects on its development. Thirdly, given the research topics, the unit of analysis for this study is interfirm relationships. This requires that the cases finally selected have to have access to both firms involved in the relationship, and if possible, even to third parties in connected relations, to improve the validity and reliability of the relationship history reconstructed in the cases. Given the limited time and resources available for this research, I also take into consideration Yin’s (2003) advice of convenience and geographic proximity. Key companies and their partner firms are preferred if they are in the same city for the convenience of access.
71 The analysis of the first interviews revealed that all the six relationships had experienced certain changes during its years of development. These were caused by, but not limited to, personnel changes, adjusted marketing and product strategies, as well as production accidents. In addition, two types of key drivers for the initiation of the relationships were identified, namely, business search and negotiation and personal relationship. Table 5.2 summarizes the demographics and key drivers for relationship initiation for the six relationships. As shown in the table, in relationships 2, 4 and 5, firms refused to have their partner firms recruited into the research project, therefore, these cases were dropped. This decision is further supported that relationships 2 and 4 are initiated by the same key drivers as those for relationships 1 and 6, while relationship 5 starts off with the same condition as relationship 3. This means that, for relationships 2, 4 and 5, their contexts and initial conditions are represented in the remaining cases. Given this, the impact of eliminating these three cases is reduced.
The remaining three cases represent different relationship contexts, with diversities in the investment structure of cooperating firms, area of cooperation and initial conditions of the relationship. The cases are complementary to each other enriching the opportunities to gain research insight.
The three companies selected for in-depth relationship case studies were contacted again for formal recruitment into the research project. The major purpose for the follow- up contacts was to collect detailed data on the development of these relationships from different perspectives and sources for comparison (data triangulation) and in-depth investigation of relationship dynamics. In order to do this, two further requests were made in the second interviews. Firstly, each company was asked to introduce a key contact in its partner firm who has been directly involved in the relationship. Secondly, respondents were asked to nominate other personnel in the company involved in the relation and help arrange interviews.
All the top managers interviewed agreed to participate in the second-round interview as well as to nominate key personnel in the partner firms for future contact. However, only the manager from Xtar Sports Event Management Corp. signed up to commit the corporate time and resources as needed by the research project. Given this, the
72 relationship between Xtar Sports and HBB Beverage Corp. (China) became the main case in this research, with the other two becoming supplementary cases.
73 Table 5.2 Summary of the relationships recommended in exploratory interviews
*Company names are adapted for confidentiality purpose * Relationships are alphabetically ordered NO. Cooperating Firms Investment Structure Cooperation Area Key Drivers for Corporate participation Selection of Cooperating Firms Relationship Initiation 1 ACE Event Operation Corp.— State-owned corp. vs. Manufacturing Business search and Key company agreed to get YES Ups Glasses Manufacturing Private corp. negotiation the partner firm engaged Company 2 Alpha International Trading Corp. State-owned corp. vs. International Business search and Key company NOT agreed NO Ltd.--Beta Arts and Crafts Group Foreign corp. trading negotiation to get the partner firm engaged 3 Besta Electronic Corp. –Sigma Foreign-invested corp. Advertising Personal relationship Key company agreed to get YES Advertising Agency vs. Private corp. the partner firm engaged 4 Dold Group--GT Pharmaceutical Foreign-invested corp. Manufacturing Business search and Key company NOT agreed NO Corp. vs. State-owned corp. negotiation to get he partner firm engaged 5 Gamma Chemicals Corp. Ltd.— Foreign-invested corp. Raw material Personal relationship Key company NOT agreed NO Delta Papermaking Corp. Ltd. vs. State-owned corp. supplier to get the partner firm engaged 6 Xtar Sports Event Management State-owned corp.vs. Sports Business search and Key company agreed to get YES Corp.--HBB Beverage Foreign invested corp. sponsorship negotiation the partner firm engaged Corp.(China)
74 5.3.3 Data collection This research adopts the working definition of process proposed by Pettigrew (1997) that process is “a sequence of individual and collective events, actions and activities unfolding over time in context” (p338). Therefore, the data to be collected in this research aims to be processual, historical, pluralist and comparative (Pettigrew 1990).
A triangulated methodology was used in both the main case and supplementary cases to collect different types of data from different sources in order to develop a more comprehensive and reliable understanding of how trust evolves in conjunction with relationship development. In-depth interviews provided rich narrative data with targeted and insightful references, while historical documents such as company reports, internal news letters, meeting minutes and media clippings were also obtained. Finally, data from both partner firms were collected in all the three cases to facilitate understanding and interpretation.
Interviews were the key source of information. These are the most common and powerful way to understand human beings (Fontana and Frey 2000). In-depth interviews, in particular, offer a range of advantages, such as the ability to probe in- depth into complex answers, therefore, they are deemed as one of the best methods to study processes and organizational changes (Gummesson 1991).
In this research, the first round of interviews was semi-structured with the purpose of obtaining as much information as possible from the informants regarding the recommended relationship so as to facilitate case selection. To begin with respondents were asked about their firm generally and then asked about the kinds of interfirm relations they were involved in. This led on to the identification of suitable relationship cases.
The follow-up interviews were also semi-structured. Theoretical sensitivity and pre- understanding of the case and context were allowed to frame questions of interest for follow-up interviews (Ryan 2006). A list of suggested questions, all of which were open-ended and generic, would be sent to interviewees in advance of interviews. Samples of these are provided in Appendix A at the end of this thesis. Given the retrospective nature of the cases, knowing what would be discussed in the interview
75 helped informants with their preparation, especially in terms of remembering key events or critical moments in the relationship history. In the interview, the list was used as a guide to ensure all topics of interest were covered. However, other aspects could emerge during the course of the interview. Respondents were encouraged and given space in the interview for a thorough discussion. Exploratory interviews in the first round were mainly composed of broad discussion based on an overview of the recommended relationship, such as its purposes and goals as well as the overall expectations of the relationship. The follow-up interviews included more in-depth questions to probe issues related to the process of relationship development, especially changes in the nature and structure of interfirm trust. Informants were encouraged to tell stories to illustrate their points, which, as they turned out, provided a deeper understanding of the phenomenon under research. Following the suggestions in the literature (Blois 1999; Cummings and Bromiley 1996), careful attention was made not to lead informants by asking direct questions regarding trust. The interviews lasted from 90 minutes to two hours.
All interviews were taped and transcribed, verbatim, in Chinese or English. Chinese transcripts were translated into English. A snowball strategy was used to identify appropriate informants for interviews. Tracking down informants who had moved on to other firms proved to be very time consuming and difficult at times. Gathering data for the main case and supplementary cases followed different routes as is described in the next sections.
5.3.3.1 Data collection for the main case on XtarSports-HBB relationship Xtar Sports Event Management Corp. (hereafter Xtar Sports) was a subsidiary to Shanghai Eagle Group (hereafter Eagle Group), the largest state-owned transportation company in China. It was established in 1997 to operate and manage the first ATP tennis event in Shanghai which was acquired by Eagle Group. It was in the same year that HBB Beverage Corp. (China) (hereafter HBB China) became the title sponsor to the tennis event and the first client of Xtar Sports as well.
The data collection for the XtarSports-HBB relationship started in December, 2006 and continued until October, 2008. The data cover a 10-year relationship history from its beginning in 1997 to 2006. The year of 2006 was chosen as an ending point for the relationship history to be studied in this research because HBB China decided to step
76 down in its tennis sponsorship program in collaboration with Xtar Sports in 2006. In light of this, the history between 1997 and 2006 represented a complete evolutionary cycle of the relationship between Xtar Sports and HBB China, though the relationship lives on.
The data collected were a combination of primary and secondary data. The primary data were collected through face-to-face interviews, phone conversations and email exchanges. A snowball sampling strategy was used to identify appropriate additional informants for interviews. The interviewees from Xtar Sports included its General Manager, Deputy General Manager, Executive Director of International Division, Managing Director of International Division and two Account Managers working at different times in charge of managing client services for HBB China. These people, from top ranks to functional divisions in Xtar Sports, were almost the whole team that represented Xtar Sports in managing and operating the relationship with HBB China. They were directly involved in the relationship with HBB China, thus, having first-hand knowledge of how the relationship had developed over the years. Among them, the General Manager, Executive Director of the International Division and Managing Director of the International Division were the key personnel who represented Xtar Sports in founding the relationship with HBB China and the main power in Xtar Sports in steering the relationship development since the relationship began. Their lead positions enabled them to provide detailed information of what had happened in the relationship as well as to explain why it had happened.
The interviews were all taped with the permission of informants. This enabled me to actively engage in the interview, ensuring that issues raised were covered with care and depth (Zaheer, Lofstrom and George 2002). The taped interviews were transcribed, verbatim, to provide a complete and accurate record of the interviews. Most informants were interviewed twice and stayed in constant touch via emails and phones to clarify confusions and provide additional information.
Secondary data were collected concurrently to supplement the primary data. Company documents were provided by Xtar Sports such as sponsorship contracts, performance reviews and market research reports. Besides, relevant media clippings were collected by the researcher from major newspapers and reliable online resources. These media
77 reports had a broad coverage related to the tennis event itself as well as the market and organizational environments between 1997 and 2006. Reported by a third-party, the media data provided an unobtrusive perspective to reconstruct the relationship history more accurately.
The internal stability in Xtar Sports between 1997 and 2006 has facilitated the identification of and contact with appropriate personnel for interviews. However, the good luck didn’t continue in the end with HBB China. HBB China has experienced a few key personnel changes between 1997 and 2006, which themselves provide potentially interesting contextual changes. As a result, no one in HBB China has been involved in the relationship with Xtar Sports throughout its 10-year history but only stayed in it for a certain period of time. This implies that a multi-informant strategy was particularly important for a correct and comprehensive understanding of the relationship evolution from the perspective of HBB China. However, the high mobility of people working in multinational corporations with multiple subsidiaries around the globe makes it particularly difficult and time-consuming to locate appropriate interviewees (Marschan-Piekkari, Welch, Penttinen et al. 2004).
The first key contact in HBB China, Mr. Alan White, was introduced to me by Xtar Sports in 2007. Alan was the Managing Director for HBB China between 2000 and 2006 but was relocated to another HBB subsidiary in Asia from 2006. At the end of the interview with him, Ms. Joe Spain was recommended for interview. Joe was the Marketing Director in HBB China between 1999 and 2002. However, at the time of my interview with Alan, Joe had left HBB and joined another company. No contact information was available from Alan, and this was when my global detective search began. The process of getting Joe for interviews, as described in the following, represents an example showing how time-consuming and difficult it can be to track down people.
Firstly, I used online search engines for helpful links, news and websites but no useful clues were found. Knowing that Joe Spain was Dutch, I then browsed Dutch websites, such as Yahoo in the Netherland, for clues. A few seemingly useful links with Joe’s name popped up. However, the stories were all in the Dutch language, which I did not understand at all. I then asked for help from a professor from the Netherlands, who
78 happened to be visiting my University at that time. We went through all these news and stories that included Joe’s name. It was discovered that Joe Spain was quoted in one story as a marketing manager of a cheese company in the Netherlands. The company was contacted soon afterwards, based on the information provided on the company website.
The initial communication with the company was not smooth due to language barriers, as the receptionist obviously didn’t speak English. After making numerous calls, I finally got through to an English speaker. She then transferred me to a department from which I was transferred to another department. I ended up talking with a former assistant to Joe Spain but was told that Joe had left the company one year ago. She refused to give me Joe’s contact information but promised to pass forward my invitation for her participation in the research project. Joe replied at the end of August, 2007, expressing her interest in participating. That was a breakthrough in this study. A phone interview was conducted, during which Joe introduced Mr. Rob Smith, former Managing Director of HBB China from 1996 to 2000. In the interview with Rob, Mr. Derick Beek, former Marketing Director of HBB China from 1997 to 1999, was recommended. Teamed with Rob, Derick was another key decision-maker in HBB China in establishing the relationship with Xtar Sports. At the time of correspondence, Derick was working for HBB Bulgaria. He was interviewed over phone in October, 2008.
Derick was the last informant recruited from the side of HBB China for this research. There are two reasons to explain this. Firstly, when asked to recommend other people for me to interview for this research, he introduced his successor, Joe Spain, whom I had interviewed already. Secondly, time and budget constraints exist that do not allow further investment in the search.
Follow-up questions for clarification and further probing of issues of interest were answered via email exchanges. Since all of these senior managers had left HBB China, no company documents were available. However, given the high-profile of the tennis event in Shanghai as well as the well-known brand of HBB, there were abundant media coverage on HBB China as well as its sponsorship in the annual tennis event. Therefore,
79 relevant media reports were collected from major newspapers and reliable online sources to supplement the primary data.
Table 5.3 summarizes the nature and scope of the data collected for the main case on XtarSports-HBB relationship.
80 Table 5.3 Summary of data collected for the main case on XtarSports-HBB relationship
*All names are disguised for confidentiality purpose Informant Position Working Primary Data Secondary Data Period (up to Interviews Phone Email Company Media 2006) Conversation Exchanges Archives Clippings Xtar Sports Even Alex Lee General 1997-2006 Twice Yes Yes Yes Yes Management Corp. Manager Mark Lueno Executive 1997-2006 Once No Yes Director of International Division Cleve Steward Managing 1997-2006 Twice No Yes Director of International Division Peter Yan Deputy General 2000-2006 Twice No Yes Manager Zoe Zang Account 2001-2004 Twice Yes Yes Manager (in charge of HBB China) Jay Fong Account 2005-2006 Once No Yes Manager (in charge of HBB China) HBB Beverage Corp. Robert Smith Managing 1997-2000 Once No Yes No Yes (China) Director Alan White Managing 2000-2006 Once No Yes Director Derick Beek Marketing 1997-1999 Once No Yes Director Joe Spain Marketing 1999-2002 Once No Yes Director
81 5.3.3.2 Data collection for supplementary cases Two relationships were selected as supplementary cases to replicate or extend the context of the main case in terms of organization types and cooperation content.
The access to the partner firms was organized by the key informants. In the end, in both cases, interviews were conducted with both the firms involved in the nominated relation. All the key informants refused to introduce internal colleagues to be interviewed, therefore, the supplementary cases relied on one key informant from each cooperating firm. However, all the informants interviewed have been involved in the relationship since it was established, thus, possessing first-hand knowledge of the relationship history. Relevant media reports were collected from major newspapers and reliable online sources for both cases. These reports related to the market environment, competition, as well as to the strategy and performance of the focal firms. In addition, requests were made for company archival documents but only one company provided documents regarding marketing planning, budgeting and evaluation.
Table 5.4 summarizes the data collected in the supplementary cases.
82 Table 5.4 Summary of data collected for supplementary cases
Relationship Relationship domain Corporate Informants Company Media Participants Number Positions Archives Clippings ACE Event Operation A collaboration involving authorizing 2 2 Deputy General Manager, No Yes Corp.—Ups Glasses Ups Glasses Manufacturing Company ACE Event Operation Corp. Manufacturing Company to develop, manufacture and market licensed products for ACE Event General Manager, Ups Glasses Operation Corp. Manufacturing Company
Besta Electronic Corp. -- A collaboration involving Sigma 2 2 Marketing Manager, Besta Yes Yes Sigma Advertising Advertising Agency providing media Electronic Corp. Agency planning and buying services to assist advertising campaigns launched by Director, Sigma Advertising Besta Electronic Corp. Agency
83 5.3.4 Data analysis As Morgan (1986) puts it, “we need to try and understand how the discrete events that make up our experience of change…are generated by a logic unfolded in the process of change itself” (p267). These thorough understandings of change require not only rich narrative data on actions but interpretation of patterns and processes in them as well. As observed by Chatman (1978), “for many narratives what is crucial is the tenuous complexity of actual analysis rather than the powerful simplicity of reduction” (p94).
The processual, comparative, pluralist and historical data collected for this research allowed production of case studies, not just case histories (Pettigrew 1990). The goal of case studies is to be both historically interpretive and causally analytical (Ragin 1987). However, there could be as many approaches to analyzing qualitative data as researchers (Eisenhardt 1989). As explicitly expressed by Miles and Huberman (1984), “one cannot ordinarily follow how a researcher got from 2600 pages of field notes to the final conclusions, sprinkled with vivid quotes though they may be.” (p16). This observation indicates the challenges faced by researchers in analyzing the rich and complex qualitative data. However, there are a few methodological rules and procedures which help to produce plausible realistic explanations based on narrative data.
An abductive approach (DuBois and Gadde 2002) was adopted in this research to allow interaction between ideas and data. This results in a frequent interaction of data analysis and data collection as the researcher moves between asking questions, collecting data and making comparisons (Eisenhardt 1989). The initial theoretical framework described in Chapter 4 of this research provided the researcher with guidance in terms of its help to focus the research on issues and outcomes that the mechanisms could produce. However, when triangulated data were collected, different perspectives about the relationship or unanticipated empirical observations occur, which inspired changes in the theory. This increased the understanding of the relationship history, directed the researcher to further areas of theory and associated literature and led to a return to informants to further explore the unanticipated issues in greater depth (DuBois and Gadde 2002). This moving back and forth between ideas and data and theory, enabled the construction of narratives with a more nuanced explanation (Stryker 1996). Each phase synthesized theories with data that subsequently guided the process for the next phase of interviews and analysis.
84 The data analysis was conducted in two stages, namely, within-case analysis and cross- case analysis (Eisenhardt 1989; Yin 2003). Given the research questions and theoretical propositions, the focus of analysis for this study is interfirm trust in dyadic business relations. Careful attention was given to changes occurring in the relationship, caused by and causing changes in the nature and structure of interfirm trust. The within-case analysis started with the write-up of case stories to enter the transcripts into a database. Convergence among interview data, company documents and media clippings was sought by getting informants involved in the data analysis process. Relevant informants would be contacted for further clarification. When conflicting statements were discovered from different informants, a third-party would be approached, such as another informant with the knowledge needed and media reports. The case stories were then analyzed with a focus on identifying and comparing events and their connections.
In case studies that produce narratives of processes, an event is the smallest meaningful unit in which changes can be detected (Poole, Van de Ven, Dooley et al. 2000), therefore, it is the principal point of access for researchers in the structuring of social actions in time (Easton 1995). Events can be conceptualized as historically singular happenings taking place in a particular time and place and sequentially unfolding or developing over time (Griffin 1992). In brief, events consist of individual or collective actors taking actions or responding to the actions of others in a certain context, which are observable and measurable (Easton 1995; Poole, Van de Ven, Dooley et al. 2000). Through events, the various forces that influence development and change, continuous and discontinuous, local and general, all come into play (Poole, Van de Ven, Dooley et al. 2000). To analyze a case is to analyze the nature, structure and sequences of events constituting the history. Particular attention is given, as already noted, to extreme, critical and deviant events occurring during the history of relationship development.
For within-case analysis, the main case and supplementary case were analyzed individually. While an event-based narrative analysis of the main case was able to provide a useful description of the generative mechanisms underlying the dynamics of trust, a comparative method is helpful to consider differences and similarities, as well as to suggest roles and importance of different mechanisms in a wider group of cases (Pajunen 2004). Therefore, in terms of replication logic, the mechanisms identified in
85 the main case were then compared to what was found in the supplementary case. Causal lumps, i.e. an interpretable pattern of multiple conjunctural causation, are expected to be found, coupled with causal specks, i.e. cases that do not conform to common causal pathways (Ragin 1997). The results are reported and explained with reference to the extant literature. By doing this, a postulation of a general scheme that compactly explains how trust works and evolves in interfirm relationships is made possible. In the following sections, details of the two-stage data analysis are provided.
Narratives must be “unpacked” (Abrams 1982) and analytically reconstructed to build a replicable causal interpretation of an historical event (Griffin 1993). To do so, event- based sequence analysis (Abbott 1988) was used. The nature of events taking place in the 10-year relationship between Xtar Sports and HBB China were firstly identified and listed, followed by the identification of sequences of events occurring over time. With the visualization techniques recommended by Miles and Huberman (1994), the data was displayed in the form of a temporal map revealing how events occurred before or after others in time and which were connected to each other in some way. While history is “lived front to back”, researchers make sense of the past from “back to front” in that we can only make sense of past events through events that happen in the future (Abbott 2001). The process of mapping the sequence of events guided the researcher to focus on conjunctures and key events.
However, a study of dynamics includes a great deal more than event sequences to develop a theory of process. Therefore, the suggestions proposed by Pettigrew (1997) for processual analysis were used as well. According to him, in addition to temporal interconnectedness, processual analysis should also be committed to identifying the role of context. Processes are deeply embedded in contexts that shape and are shaped by them (Pettigrew 1997), indicating that a key part in processual analysis is to identify the interactions between contexts surrounding firms and the evolutionary process firms experience. For example, in analyzing a relationship history, the role of context was examined at three levels, namely, external environment, including social, competitive and sectoral environments in which the cooperating firms were located, internal environment, including the structural, cultural and strategic environment within cooperating firms, and relational environment where interactions took place. The sequence of context-related events, coupled with their connections to action-related
86 events, was integrated into the temporal map, which helped to complete the landscape of history and allowed the researcher to be better able to determine causal relations between events, hence, being more precise in identifying underlying mechanisms.
Multiple angles to examine the longitudinal data are encouraged in process studies in order to strike a more effective balance between explaining the general and comprehending the specific to produce more complete explanations (Pierson 2004). Therefore, event-structure analysis (ESA), associated with the computer software ETHNO (Heise 1992), was exploited to test the reliability and enhance the explanatory power of the event sequence map drawn out manually. ESA has been successfully applied in management and organization research (Pajunen 2005; Stevenson and Greenberg 1998), and is the most developed account of how narratives can be linked to causal inference (Griffin 1993). It forces the researcher to transform a chronology of actions into a series of yes/no questions where the researcher is asked to decide if a temporal antecedent is required for the incidence of a subsequent event (Heise 1988). In short, it provides a formal tool for analyzing events and reconstituting their constituent parts as a causal interpretation of complex historical processes (Pajunen 2005).
Due to case data limitations, ETHNO could only be used to apply ESA to analyze the relationship history between Xtar Sports and HBB China. ETHNO is an MS-DOS program for constructing logic models, typically used in longitudinal examination of happenings (Heise 1992). To use ETHNO in the analysis, a raw narrative was firstly constructed with events briefly described and temporally ordered. The chronology of events was then input into ETHNO, where it was reshaped into a series of questions regarding causal connections between the events in the chronology. As new events were entered, the ETHNO program would ask the researcher a series of yes/no questions to clarify whether a previously entered event was required for the occurrence of the subsequent new event. Through this process of interrogation, the researcher was forced to dissect the running chronology of the narrative and reconstruct it with causal connections (Griffin 1992; Stevenson and Greenberg 1998). The results of ETHNO’s questions are shown in a diagram displaying the logical structure of the events underlying the chronology in the raw narratives. Though the ETHNO diagram analyzes the event sequences, it was interpreted in terms of events pointing to their prerequisites (Heise 1992). The diagram exhibited the logical constraints on how a given process was
87 unfolded, in particular, it was helpful to discover turning points and outcomes in the sequences of events that constitute a narrative. The diagram of event structures reflected the researcher’s interpretation of the causal links between the sequences that constitute the narratives (Pajunen 2005).
The diagram generated in ETHNO is compared to the map manually drawn in the early analysis to evaluate the logical interpretations of the chronology of connections between events. Whenever logical disagreement was detected, the data was then revisited for more thorough analysis and the event maps were altered. Through this process, additional insights were gained, which indicated an emergent understanding of the case. An iterative fashion was followed until a degree of saturation was achieved (Glaser and Strauss 1967).
ETHNO does not discover causality. It is the researcher, who possesses the knowledge of temporal and structural contexts, that interprets the meaning of narrative events (Pajunen 2005). However, ETHNO forces the researcher to be more precise in the judgments about the relationship between events and to reason about these events causally and chronologically (Griffin 1993). Therefore, the process of applying ETHNO to analyze the events in a relationship history enables the researcher to sharpen her insight into the connections between events before identifying the “deep structure” (Chomsky 1966) of apparent patterns. In this particular research, the deep structure is the underlying mechanisms that drive the apparent changes in interfirm trust in the relationship.
A causal event structure is constructed for each developmental phase of the XtarSports- HBB relationship. Then the four phases were linked into one overall map to explicitly generalize the concrete configuration of events. Events that were incidental or without any meaning in the causal path were extracted from the chronology and those that were retained were generally coded for further analysis. The coding was based on actors and the nature of activities conducted by involved actors, guided by both the initial theoretical framework as well as the prior understanding of mechanisms in general. By doing so, the particular events were conceptualized as instances of theoretically general sequential actions. The summary diagram generated after the abstraction was tested, replicated and modified when necessary. It provided a specific description of causal
88 linkages in the process of the relationship development and enabled a comparison of development processes at various phases in the relationship history. The coded events, together with their sequences and connections, reflect the mechanisms that explain these patterns. They were analyzed not only in terms of frequency of occurrence in the relationship history, but also in terms of their impact and importance to the relationship development.
It was not possible to use ETHNO on the supplemental cases as the information available was not sufficient. However the patterns of development, the sequence of main events, the role of key events related to changes in trust in business relationships and context effects can be identified. An understanding of the location of the critical events helped to explain what caused them and what they caused (Abell 2001). This provides the basis for cross case comparisons.
The cross-case analysis was conducted in terms of replication logic to enhance the robustness of findings (Yin 2003). The comparative analysis allows testing established models (Buthe 2002) as well as developing and reinforcing general theories (Kiser and Hechter 1991). Yet, the comparative analysis is not done to seek conformity among cases but to compare variances (Ragin 1997). In general, in the case of complex processes, it is difficult to compare complete event sequences and structures as it could be misleading, especially when the goal is to build theories of generative mechanisms (Pajunen 2004). Given this, the processes in supplementary cases were divided into parts that seemed important for understanding the process as a whole. The segmentation focused on significant things or outcomes related to the process of trust dynamics as explicated in the event structure analysis. The mechanisms identified in the main case were then taken as an operational template to determine how closely the empirical observations in the supplementary cases match it. Such a comparison of explanations regarding how certain mechanisms work provided an opportunity to consider how the dynamics of trust operates in interfirm relationships in different contexts. When the results of comparisons suggest similarities, the findings could be seen as descriptions of general mechanisms that provide intelligible explanatory accounts of how the dynamic processes work (Pajunen 2004). When differences are detected in the comparison, possible explanations were sought by revisiting the data and referring to extant literature. These differences are treated as significant parts in the research that provided
89 complementary answers and encompassed a broader domain of potential mechanisms generating the same phenomenon.
90 Chapter 6 Case Analysis of XtarSports-HBB Relationship ---Initial building phase (1997-early 1998)
The conceptual model described in Chapter 4 involves an iterative cycle of how trust evolves in a business relation through interactions taking place over time in the context of a relationship structure, that itself changes over time, as well as a broader external environment (including connected relations and task environment). Trust exists between actors and is reflected in their schemas, it is a type of resource that in various ways may impact on the activities performed (Huemer 2004a). Guided by this framework, analysis was conducted to understand the dynamics of trust based on an investigation of how the relationship has developed over the years. The complexity of business relationships indicates the need to research both the overall relationship, such as in terms of power and commitment, and individual episodes, such as particular project decisions, as well as the interaction between the partner firm (Ford 1980b).
The analysis of relationship evolution is conducted by tracking changes at three levels, i.e. external environment of the relationship, internal environment of the relationship and the process of interaction in the focal relationship. The external environment of the relationship refers to the macro market environment in which the relationship operates such as the development of the tennis market in Shanghai and the performance of the beverage market in China. The internal environment involves organizational and personnel structures in partner firms, their strategies and resources, and the development of their business networks. Changes in these external and internal environmental aspects affect the interaction between firms and hence, have impacts on the focal relationship. The process of interaction is examined by identifying key events that drive changes in the content and nature of interactions in the focal relationship. The analysis of the relationship evolution sets the ground for studying the dynamics of trust in business relationships and for identifying underlying causal mechanisms.
Events related to the external environment, internal environment and interactions between focal firms during the relationship history were tracked down and analysed in terms of their sequences and connections. This leads to the construction of a historical narrative of the relationship in which past events can be interpreted through events that happen in the future (Abbott 2001). As discussed in Chapter 5, events are what entities
91 do or what happens to them. Entities can be a person, an organization, an idea, a field of any social unit that changes over the course of the change processes. While events can be complex composing sub-events involving multiple entities (Roberts 1996), events are identified at the level of single actions/decisions by one entity for the purpose of the thesis.
Figure 6.1 presents an overview chart of the key events occurring during the 10-year relationship between Xtar Sports and HBB China, showing the sequences of and connections between these events. These events are summarized and categorized into certain codes so as to discern the general evolutionary pattern and to identify developmental phases for future in-depth analysis. Key events are categorized into four kinds, including environmental events, focal relation action/interaction events, connected relationship events and third-party events. Environmental events refer to those events related to external and internal environmental changes such as personal promotion and internal organizational restructuring. Focal relation action/interaction events are actions by and interactions between the focal firms in the relationship in terms of resources, actors, activities and schemas. The connected relationship events involve those occurring in connected relationships of partner firms, such as HBB China working with another firm on the music event in Beijing and Shanghai Municipal Government instructing Xtar Sports to bid for the Tennis Masters Cup. Finally, third- party events refer to those occurring within other organizations with or without connection to the focal firms. In addition to being coded based on the spatial scope, the events are further coded with more details reflecting actors, interaction domain and outcomes. Events in the same categories are shaded in the same colour for grouping purposes. Table 6.1 lists the codes used to distinguish events. Table 6.2 provides explanation of each coded event included in Figure 6.1.
92 Figure 6.1 Summary chart for XtarSports-HBB relationship history (1997-2006)
InE/H/R ExE/TMkt(-) ExE/BMkt(+) TP1/A InE/H/Strat TP2/A
TP3/A FFS/H
XCP1/A XCP2/A XCP1/I Phase I InE/X/R FFA/H
FFA/X FFI/Biz
FFI/Soc FFA/X
FFA/H OC/RES1
FFS/X HCP1/I FFA/X OC/Perf(+)
FFA/H ExE/TMkt(+) Phase XCP1/S InE/X/R TP4/A II FFS/X InE/H/Strat FFA/X InE/X/Org FFA/X FFI/Soc(+) FFA/X FFI/Biz
FFA/H/ExR FFA/X/ExR FFA/H ReE/Ppr
FFA/X/ExR FFA/H/ExR OC/RES2
FFI/Biz ExE/TMkt(+) ExE/BMkt(-) XCP2/Ppl InE/X/Ppl FFA/X InE/H/Strat FFA/X/ExR Phase HCP2/Strat InE/X/R ReE/Pwr III FFA/H/ExR FFI/ExR FFS/X InE/X/Org XCP3/I FFA/X/ExR InE/H/Org OC/RES3
FFA/X/Ppl InE/H/Strat HCP2/S XCP1/S InE/X/Pwr
FFA/H XCP2/S Phase IV FFA/X FFI(-) ReE/Ppr
OC/RES4
93 Table 6.1 Codes of events for the summary chart for XtarSports-HBB relationship (in Figure 6.1)
Environmental factors Process: InE: internal environment I: interaction ExE: external environment A: activity ReE: relational environment R: resource Strat: strategy S: schema TMkt: tennis market ExR: extra role BMkt: beer market Soc: social Org: organizational structure Biz: business Ppl: personnel structure Ppr: personal relationship Outcome: Pwr: power structure OC: outcome Perf: performance Actor: RES: relationship evolutionary status H: HBB X: Xtar Sports Links and symbols: TP: third party Sequential link XCP: party connected to Xtar Sports Transformative link HCP: party connected to HBB + positive/more FF: focal firm - negative/less
94 Table 6.2 Explanation of coded events in Figure 6.1
Note: Coded events are alphabetically ordered Coded events Explanation Event category ExE/BMkt(-) Discouraging beverage market in the external environment Environmental event ExE/BMkt(+) Encouraging beverage market in the external environment Environmental event ExE/TMkt (-) Discouraging beverage market in the external environment Environmental event ExE/TMkt (+) Encouraging beverage market in the external environment Environmental event FFA/H Event related to focal firm’s activity (HBB China) Focal event FFA/H/ExR Event related to focal firm’s extra-role behavior (HBB Focal event China) FFA/X Event related to focal firm’s activity (Xtar Sports) Focal event FFA/X/ExR Event related to focal firm’s extra-role behavior (Xtar Sports) Focal event FFA/XPpl Event related to focal firm’s activity regarding personnel Focal event FFI (-) Reduced interactions between focal firms Focal event FFI/Biz Event related to interactions between focal firms in business Focal event contexts FFI/ExR Event related to interactions between focal firms in extra- Focal event contractual contexts FFI/Soc Event related to interactions between focal firms in social Focal event contexts FFS/H Event related to focal firm schema (HBB China) Focal event FFS/X Event related to focal firm’s schema (Xtar Sports) Focal event HCP1/I Event related to interaction between HBB China and HBB- Connected relationship event connected firm 1 HCP2/S Event related to changes in schemas in HBB-connected firm Connected relationship event 2 HCP2/Strat Event related to changes in strategies in HBB-connected firm Connected relationship event 2 InE/H/Org Event related to changes in organizational structure in the Environmental event internal environment in HBB China InE/H/R Event related to changes in resources in the internal Environmental event environment in HBB China InE/H/Strat Event related to changes in strategies in the internal Environmental event environment in HBB China InE/X/Org Event related to changes in organizational structure in the Environmental event internal environment in Xtar Sports InE/X/Ppl Event related to personnel changes in the internal Environmental event environment of Xtar Sports InE/X/Pwr Event related to changes in the power structure in the internal Environmental event environment in Xtar Sports InE/X/R Event related to changes in resources in the internal Environmental event environment of Xtar Sports ReE/Ppr Event related to changes in personal relationships in the Environmental event relation ReE/Pwr Event related to changes in the power structure in the relation Environmental event TP1A Event related to activities in third party 1 Third-party event TP2A Event related to activities in third party 2 Third-party event TP3A Event related to activities in third party 3 Third-party event TP4A Event related to activities in third party 4 Third-party event XCP1/A Event related to activities in XtarSports-connected firm 1 Connected relationship event XCP1/I Event related to interaction between Xtar Sports and Connected relationship event XtarSports-connected firm 1 XCP1/S Event related to changes in schemas in XtarSports-connected Connected relationship event firm 1 XCP2/A Event related to activities in XtarSports-connected firm 2 Connected relationship event XCP2/Ppl Event related to personnel change in XtarSports-connected Connected relationship event firm 2 XCP2/S Event related to changes in schemas in XtarSports-connected Connected relationship event firm 2 XCP3/I Event related to interaction between Xtar Sports and Connected relationship event XtarSports-connected firm 3
95 Based on patterns and structures of event sequences, four developmental phases are identified. Most events in phase I are connected in a convergent manner, implying a mutual search and common objectives to achieve by Xtar Sports and HBB China, i.e. to form a collaborative relationship and to access complementary resources available in the partner firm. The event sequence structure in Phase II seems to be more divergent with links connecting the actions of focal firms, indicating increased interaction across various domains such as closer collaboration on the tennis event and more social exchanges. Further, more events take place in the end involving Xtar Sports, some of which lead to changes in its internal environment. This could reflect the ambition of Xtar Sports as a newly-established event management firm to learn and experience more in the relationship with HBB China. This trend is more obvious in Phase III, where events follow two clear lines, one describing the interaction between the focal firms mostly in extra-contractual contexts, the other related to Xtar Sports’ activities for its own business development. This shows that two transformational processes seem to be occurring concurrently. The relationship is transitioning from a simple contract- driven buyer-seller relationship to a more sophisticated partnership with more cooperation in more areas. On the other hand, Xtar Sports experiences an internal transformation from an operator of a single tennis event to a professional event management firm seeking opportunities for further development. Events related to these two lines of development are connected, indicating the interaction between the internal environment in focal firms and the relational environment. In contrast to the intensity of events in Phase III, Phase IV includes much fewer events. This is a sign of restrained scope of interaction between Xtar Sports and HBB China. Further investigation of the event sequence map shows that this is triggered by two environmental events that lead to changes in organizational structures in HBB China and the internal power structure in Xtar Sports.
Following the identification of the four phases based on pattern analysis, I went on to identify the events that bound and distinguish the developmental phases. In 1998, HBB China signed the first contract with Xtar Sports, which signalled the formal establishment of the relationship. In 2002, HBB China decided to do more events for branding purposes and discussed with Xtar Sports expanding the cooperation into music events. This was followed by the two partner firms cooperating on new projects, in addition to the tennis event, which included music events and HBB China’s annual
96 convention for major distributors. However, such expansion in cooperation halted when HBB China began its organizational and personnel restructuring in 2004 and Xtar Sports experienced adjustment of its internal power structure after a few personnel changes. Changes in these internal environments led to a downgraded scope and scale of interaction between the partner firms in that they only worked together on the tennis event from then, the same as when the relationship first began in 1998.
These key events are turning points in the XtarSports-HBB relationship history that triggered major changes in the relationship environment and the content of interaction between the partner firms. The identification of these events support the distinction of the four phases as suggested in Figure 6.1. Guided by the content and nature of interaction taking place, the four developmental phases are named as the initial building phase (1997-early 1998), the learning phase (mid 1998-2001), the transitioning phase (2002-2004) and the rebuilding phase (2005-2006). Each phase is characterized by a different relationship context that drives and is driven by trust of a different nature and different assortments of underlying mechanisms.
The results of the in-depth analysis for each developmental phase will be presented and discussed in four chapters, followed by Chapter 10 where the discussion is summarized by a model of dynamics of trust in business relationships. Each chapter will be structured in this way. Firstly, an overview of the relationship evolution and trust development in the particular phase will be presented as an introduction. Following that, findings are reported in terms of changes in external environment, internal environment, as well as the processes of interaction in the relation. The section also includes an event path diagram of the phase compared with the results of a computer generated path diagram generated using the ETHNO program. After that, process of trust development in the particular phase will be discussed with mechanisms indentified underlying the connections between events taking place in the phase to explain the trust dynamics. Finally, relevant propositions suggested in Chapter 4 will be evaluated. In the rest of this chapter, the findings for the initial building phase from 1997 to mid 1998 are reported and discussed.
97 6.1 Overview The initial building phase refers to the process by which initial conditions of trust were built through the processes of partner selection and relationship establishment. Figure 6.2, which is an excerpt of Phase I from Figure 6.1, shows the pattern of the relationship development during this phase in terms of different types of events occurring over time being linked in series or operating in parallel. Most interactions took place in a business context, where both firms underwent rounds of negotiation to set up a formal relationship. The reputation of HBB as an established brand company, with rich experience in sports sponsorship presented the needed complimentary resources for Xtar Sports, while the exclusive right to stage an ATP tennis event in Shanghai matched the need of HBB China for marketing opportunities in China. Both firms were attracted and motivated to forge a cooperative relationship. Resource-based trust played a critical role in driving the initiation of the relationship. However, with the lack of hands-on experience of cooperation, the trust in general is not concrete and true but rather wishful thinking about a desired efficient relationship in the future.
98 Figure 6.2 Summary chart for XtarSports-HBB initial building phase (1997-early 1998)
ExE/TMkt(-) ExE/BMkt(+) InE/H/R
InE/H/Strat TP0A
TP1A FFS/H
TP2A
XCP1/A XCP2/A
XCP1/I
InE/X/R
FFA/X FFA/H
FFI/Biz
FFI/Soc FFA/X
FFA/H
OC/RES1
Environmental factors Process: InE: internal environment I: interaction ExE: external environment A: activity ReE: relational environment R: resource Strat: strategy S: schema TMkt: tennis market ExR: extra role BMkt: beer market Soc: social Org: organizational structure Biz: business Ppl: personnel structure Outcome: Ppr: personal relationship OC: outcome Pwr: power structure Perf: performance Actor: RES: relationship evolutionary status H: HBB Actor: Links and symbols: X: Xtar Sports H: Heineken China Sequential link TP: third party XX: XinXin Sports Transformative link XCP: party connected to Xtar Sports TP: third party + positive/more HCP: party connected to HBB XCP: party connected to XinXin - negative/less HCP:FF: party focal connected firm to Heineken China FF: focal firm
99 6.2 External environment Since early 1990s, the Association of Tennis Proefssional (ATP) has been trying to enter the market in China by introducing its tennis events. In 1995, the Entertainment and Sports Programming Network (ESPN) staged an ATP-franchised event in Shanghai, but hte event turned out to be a big failure with an extremely low attendance rate, due to the sluggish tennis market in Shanghai that showed little interest in tennis. As a result, ATP tried to sell the franchise to move the event out of Shanghai.
At that time, many high-ranking officials in the Shanghai Municipal Government were tennis lovers, so the government tried to keep the event in Shanghai but they had to find a company to invest in the franchise. Eagle Transportation group (referred to Eagle Group hereafter), which is the largest government-owned public transportation company in China, agreed to invest and purchased the ATP franchise at the cost of USD1.12 million in 1997. The Shanghai Municipal Government was happy with the purchase and promised its support to the tennis event with any resources the government had. This marked the beginning of the close relationship between the Eagle Group and the Shanghai Municipal Government, which is a connected relationship to the focal relation, and later turned out to have significant effects on the way the XtarSports-HBB relation developed.
Despite the promised involvement of the government to facilitate event operation, the tennis market in Shanghai was not promising at that stage. A survey revealed that less than 0.01% of the population in Shanghai was frequent tennis players in 1997 (Research Center of Event Statistics 2006), which indicated that the tennis market in Shanghai was filled with risk and uncertainty when Xtar Sports staged the ATP event for the first time in 1998.
While the tennis market in Shanghai was in its infancy in late 1990, the beverage market was burgeoning by then and attracted international businesses. Among the first foreign beverage brands that entered into the Chinese market was HBB which made its debut in mid 1990s through its associate company, Asia Beverages Limited (ABL), which HBB owned equally with Fraser & Neave, Limited. ABL bought into a joint
100 venture of Shanghai Mila Brewery in 1988 before HBB China was formally established in 1996 in Hongkong and began to import HBB-branded beverage into China. A representative office in Shanghai was set up as its sales and distribution arm. The office was later transformed into HBB Trading (Shanghai) Co. Ltd.
6.3 Internal Environment With the purchase of the franchise, the Eagle Group established Xtar Sports as its wholly owned subsidiary to produce, manage and promote the ATP event. Xtar Sports started as a small company with only 6 employees. No one in the company had any real background in sports event management. Being aware of the situation and requested by ATP to get professional event management to run the ATP event, Mr. Lesley Wong, the Chairman of Eagle Group, began to look for experts in sports management for Xtar Sports. Through professional and personal networks he was introduced by a person from Shanghai Sports Bureau, to Mr. Vincent Hu, then President of the Asia Tennis Association. Mr. Hu recommended Mark Lueno and Cleve Steward, two Americans who were certified event managers with rich experience in promoting tennis events and with extensive personal and professional networks in the industry. They were soon invited on board to supervise event promotion and management in Xtar Sports.
Mark and Cleve were professional tennis players for years before starting their own career in tennis event management in South America. Later, they moved to Hong Kong and worked for the Salem Open, which was one of the earliest professional tennis events in China. On joining Xtar Sports, Cleve had had over 10 years’ experience in the sports industry and had promoted, managed and organized hundreds of sporting and entertainment events in North America, Europe and Asia. Both of Mark and Cleve had close connections to ATP, especially Cleve, who was a member of the ATP Tournament Council. Thus both brought with them considerable personal experience and expertise plus an established set of contacts and networks in the tennis industry. Mark and Cleve were seeking opportunities in China to build their career seriously in the sports industry when the invitation came from the Eagle Group. It was not a difficult decision for them to accept the offer and join Xtar Sports in 1997. They proved to be important assets to Xtar Sports especially in the early years of its development, as they guided the operation of the ATP event and trained other staff in Xtar Sports in professional event
101 management. They brought in their prior learning experience to Xtar Sports and played a key role in initiating the cooperative relationship with HBB China, which is further analyzed later in this section.
Since settling its business in China in mid 1990s, HBB China had been doing very well with its beverage sales in the market and had grown a lot, especially in the south of China. However, HBB China was seeking more opportunities to further enhance its brand value and expand its market in China. At that time, HBB China picked Shanghai as one of the three key markets in China to be further developed and was interested in raising HBB’s profile in the city. Following this strategy, HBB China was open to all sorts of marketing proposals but had particular interest in sponsoring large-scale events in China.
HBB China, at that time, was headed by Mr. Robert Smith, the founding General Manager, with Mr. Derick Beek as the Marketing Director. Both of them had rich experience in the beverage industry, however, they were relatively new to the Chinese market and their experience of working with Chinese companies especially in the area of marketing and event management was very limited. Most of their experience had been from working with advertising agencies and manufacturers in arm’s length relationships.
6.4 Process of interaction in XtarSports-HBB relationship Though Xtar Sports was backed up by the largest public transportation company in China and closely related to the local government, the majority of its staff lacked knowledge and professional experience in sports marketing, which could have a detrimental effect on the staging of the event. The awareness of its limited resource base led Xtar Sports to search for a major sponsor with complimentary resources, including a compatible corporate brand image associated with tennis, strong financial capabilities and experience of sports sponsorship---preferably in tennis events. This observation is in line with the argument of many researchers that firms are more likely to seek partners with complimentary resources and capability (Anderson and Narus 1991; Collis and Montgomery 1995; Wilkinson, Young and Freytag 2005).
102 Xtar Sports approached and presented the sponsorship proposal to a number of potential clients that matched the selection criteria, one of which was HBB China. At that time, Mark Lueno was the only person in Xtar Sports that had actual experience of working with HBB, because HBB was the official drink sponsor to the Salem Open in Hongkong in 1995. Though it was a small project without much interaction with HBB people, Mark was still impressed by the commitment of HBB in tennis events which was part of its corporate agenda. This well-conserved relationship energy (Havila and Wilkinson 2002) was reactivated when Mark recommended HBB to Xtar Sports as a potential sponsor. The market research Xtar Sports conducted further revealed the HBB had successfully built a premium brand image in China by then and, more importantly, the company had considerable experience in sponsoring tennis events globally, including the Australian Open and American Open. Attracted by the resources, reputation and experience HBB possessed, Xtar Sports contacted HBB China to get them into a sponsorship deal in late 1997.
Alex Lee, General Manager, Xtar Sports, “When we choose clients, especially such a big client, there must be some criteria. First of all is the client’s brand. It must be relevant to tennis and have something in common with us, in other words, we have a market in common, a market of consumers in common. We are of similar levels, i.e. its image matches the image of tennis. This is the first criteria. Secondly, this company should be financially strong. The brand could be fit to tennis, but if they don’t have enough money, this won’t work out. Thirdly, we would pay particular attention to those companies in the world which have sponsored tennis events often. So the first thing in selecting a client is to follow these three steps. HBB was a very important company among them.”
Mark Lueno, Executive Director, International Division, Xtar Sports, “During the mid 1990’s, they (HBB) were a very strong player globally in sports sponsorship. From sailing to Jazz – I know that doesn’t sound like sports, but it’s the same demographic for tennis – they were getting very strong into tennis with the US Open, the Australian Open. They title-sponsored events in Europe of course, they were one year after ours,
103 they were in Singapore as a title sponsor, they are in Auckland as a title sponsor. So they know tennis – they knew tennis. That was their corporate agenda. And like any promoter anywhere in the world, you look at who is sponsoring the sport and you make efforts to latch on to that kind of corporate agenda especially with a company like HBB.”
The business proposal Xtar Sports handed to HBB Shanghai office happened to be noticed by the Marketing Director of HBB China, Mr. Derick Beek, who was, at the time when the proposal was received, visiting the Shanghai office. He showed great interest in the sponsorship plan and without his interest and support at inception, the proposal could well have followed a different path within HBB.
The interest from HBB China in event sponsorship was born out of its branding strategy for the Chinese market. HBB China wished to raise its brand awareness and strengthen its brand image through event marketing. However, interviews with former senior managers in HBB China disclosed that its initial interest in working with Xtar Sports on a tennis event was based on Xtar Sports’s unique resources of government relationships, i.e. its connected relations.
Before being contacted by Xtar Sports, HBB China was approached by different companies that proposed various sports events in China for sponsorship, including a table tennis tournament, a beach volleyball tournament and a badminton tournament. However, learning from the early experience of working in China, though limited, the senior managers had realized how important it was to be well-connected to the government to get business done. Therefore, early proposals from other companies were not satisfactory as they failed to convincingly show the right connections with the government to make those events happen in the way that the senior managers from HBB China wanted. The situation was completely different when Xtar Sports tried to sell the sponsorship of a tennis event in Shanghai. The proposal clearly presented in detail the close ties between Xtar Sports and the Shanghai Municipal Government through the Eagle Group, the parent company of Xtar Sports. This was obviously an attractive resource to HBB China that gave it some confidence in staging the event successfully in Shanghai.
104 Derick Beek, former Marketing Director, HBB China, “We did of course look at their local partner, which was at that time Eagle Group. They are their local partner which is a strong local transportation company which is 100% mainland Chinese company, which gave them the connections, and the local connections basically, and contacts to get it (the tennis event) done.”
Negotiations between Xtar Sports and HBB China started in late 1997. The negotiations went on for five months and turned out to be important learning experiences for both parties when the firms tried to seek agreement especially in terms of resources and schemas. For HBB China, the priority was to confirm the strong backup from the local government for the event, therefore, when Mark Lueno and Cleve Steward, representing Xtar Sports, did their first business presentation in Hongkong to Mr. Smith, GM of HBB China, and Mr. Beek, Marketing Director, the first hour was spent discussing in detail how Xtar Sports was related to the local government and what the government would do to support the tennis event. The picture presented by Xtar Sports was convincing to HBB China that the event was achievable as blueprinted with the substantial support from the local government.
Robert Smith, former General Manager, HBB China, “Both Mark and Cleve presented us a picture of (how the event would be staged with the support of local government)….I was in that meeting together with my marketing manager. We both said that this was starting to look like something. It is something that we really know that what Cleve presented can indeed possibly be executed because of the support of the local government.”
At this stage, the key relational objective for Xtar Sports was to secure HBB China as the title sponsor to the event, so as to access its resources and learn from its event marketing expertise. As a newly-established company with little experience in sponsorship and event management, Xtar Sports started its learning during the negotiation, when it consulted various external experts such as personal friends and third-party agencies on what benefits to offer to HBB China in the sponsorship program. The advice gained from those experts helped Xtar Sports to offer a package of benefits
105 that catered to the needs of its potential client. As indicated in the interviews with former senior managers in HBB China, the learning efforts made were acknowledged by HBB China, which was impressed by Xtar Sports’s professionalism in its client- oriented services.
Alex Lee, General Manager, Xtar Sports, “The proposal that we discussed and consulted others with was well-received by HBB China as they thought we had consideration of their interest…As a matter of fact, we did not have much experience at the beginning, but we learned very hard. Our team took every chance to learn and half a year after the establishment of the company, most people in Xtar Sports sounded like professionals.”
At that time, HBB China was under the management of a European team, who appreciated fair business and had easy-going personalities. The European people were friendly and social, however, they could be straight-forward and demanding in pursuing their business interests at the negotiation table. Xtar Sports showed its respect to such a business manner, especially when it became gradually aware of the European old school traditions and HBB’s business-oriented corporate culture. This learning drove Xtar Sports to adjust its communication strategy to be candid and clear-cut with HBB China in the rest of the negotiation and later in the relationship as well.
There were no resource ties established between the two companies during the course of negotiation, except for commitments of time and effort in handling the negotiations. Besides, only basic activity links and actor bonds existed. Negotiation was the main activity that linked both parties, but not the only one, as social interactions took place as well. The Xtar Sports team, including Mark, Alex and Cleve, would pay business visits to HBB China in Hongkong and at night they would go to bars together with senior managers from HBB China to talk about business. Out of these interactions in social settings, senior managers from HBB China got more familiar with their counterparts in Xtar Sports, professionally and personally, while Xtar Sports learned more about HBB China in terms of its professionalism in sports sponsorship, corporate strategies for the Chinese market and its corporate culture that respects fair business.
106 Personal relationships started to develop during this period especially between the European managers from HBB China and Mark and Cleve from Xtar Sports. As a matter of fact, the chemistry was felt by Robert Smith, then General Manager of HBB China, at the first sight of Mark and Cleve, who impressed him as very delightful and pleasant. As Rob put it in the interview, “Mark and Cleve are extremely charming and very very pleasant guys. I remember that from the first moment they walked into the office, there was chemistry between Mark and Cleve as a person, not so much of Xtar Sports because we didn’t know anything about Xtar Sports at the moment, but it was really two figureheads of Mark and Cleve.”
The first-sight affection may have sparked initial interest in HBB China to know more about Mark and Cleve, however, it is these Americans’ talent, knowledge of the tennis industry and professionalism in business, as manifested during the negotiations, that earned them real confidence and respect from the management in HBB China. The similarity between American and European cultures helped as well to grow affinity between the two teams who shared a sense of humor and appreciation of open communication. As HBB managers became comfortable working with Mark and Cleve, their desire for going into personal relationship naturally emerged, which resulted in their willingness of hanging out with Mark and Cleve even when the negotiations were still on.
The course of negotiations and associated personal interactions represented a mutual learning experience for Xtar Sports and HBB China, where a high level of schema couplings were developed between the two teams. It reinforced Xtar Sports’s previous beliefs in HBB China as a reliable partner and reaffirmed its determination to build a cooperative relationship. As for HBB China, its confidence in its potential partner was dominantly based on its belief in the credentials of Mark and Cleve, while Xtar Sports remained an unfamiliar name being a newly-established company.
Mark Lueno, Executive Director, International Division, Xtar Sports, “I think just the fact that our personalities matched very well (was a convincing factor to build the relationship with HBB China). We are both in this together type of personality, and we want to have fun with it.
107 It’s sports, so we obviously want everyone to (engage). But it’s a business as well.”
Robert Smith, former General Manager, HBB China, “The reason why we feel comfortable with working with Xtar Sports was mainly because of the fact that Mark and Cleve were in charge. And they had proven to us, given their track record in the past before they started operating on behalf of Xtar Sports, that they organized quite a number of relatively very successful events elsewhere…so they’ve been involved in that sort of activities for quite a while before they started in Shanghai. So from the organizational, management side, I think no problem.”
The deal was finally closed in early 1998 when HBB China signed a legal contract to become title sponsor and the event was renamed the HBB Open. The contract was a 1+2 contract, which means that HBB China had the right to terminate the contract at the end of the first year if it was not satisfied with the investment. Xtar Sports tried to resist this but was not successful.
To summarize, Figure 6.3 maps out the key events at the initial building phase and the interconnection among them, as discussed above. To highlight the changes in actors, activities, resources and schemas, events with focus on changes in actors are marked in ovals and events with focus on activities are highlighted in diamonds, while events with focus on changes in resources are in rectangles and those focused on changes in schemas are in rounded rectangles. These events are connected sequentially, i.e. leading one to another, or effectively, i.e. impacting the emergence of another event. For a reliability test, Figure 6.4 presents a sequence chart of critical events as an output of ETHNO software. The codes of events are explained in Table 6.3. The comparison between these charts reveals no inconsistency in understanding the sequence of and connection between the major events occurring in this phase, which is not surprising as the Ethno program relies on researcher-based identification of micro links among events in order to construct the event network. But it is reassuring in confirming the overall logic of the paths and adds to the validity of the event map.
108 Figure 6.3 Critical events in the initial building phase (1997-early 1998) HBBHeinekenXtar Seventports event event Actor-focused event activity-focused event resource-focused event schema-focused event EventsXtarXinXin Sp with ortsevent eventother parties X-H Interactive event External sequential connection effective connection Events with other parties environment SH gov.wished to keep ATP tried ATP event in SH to move its event out Tennis mkt under of SH developed in SH
Eagle Group purchased HBB ATP franchise entered CH
Internal SH gov. helped Environment. to look for SH gov. promised Xtar was talents for Xtar support to the tennis established H. needs event mktg opportunity in China Lueno and Steward were hired
Interaction in Relationship Xtar looking for Marketing Director of event sponsors H. China happened to notice Xtar’s proposal Xtar consulted experts for advice
1+2 contract Xtar Negotiation signed approached H. began
Social interaction began
109 1997 Mid 1998 Figure 6.4 ETHNO event sequence chart for XtarSports-HBB initial building phase (1997-early 1998)
110 Table 6.3 ETHNO codes of key events for the initial building phase in Figure 6.4
ETHNO codes Explanation of event TensNotPoplrSH Tennis was not popular in Shanghai and only less than 0.01% of the population in Shanghai played tennis often ATPselingTen ATP wanted to sell the franchise to get it out of Shanghai after the failure of the tennis event in the city staged by ESPN SHgovKeepTen Shanghai Municiple Government wanted to keep the event in Shanghai BSpurchasTen The Eagle Group agreed to invest in the event and purchased the franchise at the cost of USD 1.12 million GovPrmSuppt Shanghai Municiple Government promised to render any support needed to stage the tennis event successfully XXestbshed. Xtar Sports was established as a subsidiary to the Eagle Group to manage the ATP tennis event. GovSrchTalnt The Eagle Group asked its government contact to look for experts in tennis event management MKCHjoinXX Mr. Lueno and Mr. Steward were recommended to the Eagle Group by President of Asian Tennis Association and joined Xtar Sports as experts in sports marketing HBrndExpTen HBB was an active sports sponsor especially in tennis and had rich experience in sports sponsorship. HDvlpCHmkt HBB China saw great potential in the beverage market in China and had strategic plan of exploring in the market to develop its business in CH. HlookingForMktgOppr HBB China was looking for appropriate marketing opportunities to promote its brand in China XXapprHtoSellSpsship Xtar Sports chose HBB China as a potential client and approached it to sell the sponsorship HMktgDirHappenToNotcXXprpsal The business proposal submitted by Xtar Sports happened to be noticed by the Marketing Director of HBB China who was visiting HBB Shanghai Office XX-Hnegotiation Xtar Sports and HBB China had rounds of negotiation in SH and HK. XX-HsocialInteractionBegan Xtar Sports people would go on trade visits with HBB people at night and they would go to bars together to talk about business. XXconsulted Experts on Xtar Sports consulted various experts on what benefits to offer SpsshipDeals to HBB China in the sponsorship program 1+2contractSigned HBB China signed a 1+2 contract, which means that it had an option to review and terminate the contract if they were not satisfied after the first year.
111 As demonstrated in these maps, the pattern of events in the initial building phase is convergent, which implies that both firms share a mutual search process with common relational objectives of establishing a formal cooperative relationship. But the charts are more revealing than identifying patterns. Figure 6.3 shows that the emergence of the event of both firms’ agreement to sign a contract to establish the relationship is effectively connected back to three events, namely, Xtar Sports gaining support from Shanghai Municipal Government, Xtar Sports’s recruitment of Mark Lueno and Cleve Steward and HBB China’s search for marketing opportunities in China. Since these three events are environmental events related to the internal environments in the focal firms, the effective connection between them and the event of relationship establishment indicates the impact of environmental factors on relationship evolution. The inspection of the ETHNO chart of Figure 6.4 further demonstrates that the influence of environmental events on relationship evolution is not direct, as other events exist between the temporal spaces of environmental events and the final event of relationship establishment. For example, the event of HBB China searching for marketing opportunities in China (coded as “HlookingForMktgOppr” in Figure 6.4) leads to the emergence of the event of the Marketing Director of HBB China becoming interested in the business proposal of tennis event sponsorship submitted by Xtar Sports (coded as “HMktgDirHappenToNotcXXprpsal” in Figure 6.4), which, in turn, results in the occurrence of the event of negotiation between Xtar Sports and HBB China (coded as “XX-Hnegotiation” in Figure 6.4) before the event of signing a contract (coded as “1+2contractSigned” in Figure 6.4) takes place. The observation of such a structure of event sequence and connections unearths the point that the impact of environmental events on relationship evolution is realized through their impact on the actions and interactions of focal firms, which happens through the operation of various types of mechanisms. Given the purpose of this thesis, focus is placed on generative mechanisms for trust dynamics. The following section develops detailed discussion on trust dynamics and their underlying mechanisms.
6.5 Trust development in the initial building phase The initial building phase in the relationship was embraced in an environment filled with unpredictability and risk for both Xtar Sports and HBB China. Though the ATP event franchise presented a business opportunity for investment, the tennis market in
112 Shanghai in late 1990s was very underdeveloped with only a marginal population interested in the sport. Internally, HBB China had little experience of cooperating with Chinese companies, while Xtar Sports was rather restricted by its limited knowledge and expertise of sports event management, which added to the pressure of staging the event successfully.
Under such circumstances, Xtar Sports was strategic in looking for a title sponsor with complimentary resources. Hence, when HBB China was identified as a potential client, Xtar Sports made explicit its aspirations for a cooperative relationship, which apparently offered HBB China the upper hand – the more powerful position at the inception of the relationship. This is reflected in how HBB China exerted its influence in dictating the 1+2 contract which established its advantage in the relationship.
Alex Lee, General Manager, Xtar Sports, “The two thoughts we had earlier in the relationship were, first, they could give us money. We expected much money from them. Secondly, in terms of event promotion, we wanted to learn from their experience.”
Power asymmetry may exist at this phase of the relationship, but the possible risks and vulnerability for Xtar Sports associated with the imbalanced power structure were eased by the trust Xtar Sports placed on HBB China. Despite the lack of experience of cooperation, Xtar Sports was convinced by the value of its partner’s resources of a premium brand image, rich experience of event marketing and stable financial strength. These resources were seen as significantly useful to promoting the event and its brand. In addition, the interactions taking place during the negotiations, though brief, had impressed Xtar Sports with HBB China’s professionalism and commitment in sports sponsorship. This discovery adds to the internal motives of Xtar Sports to form the cooperative relationship with HBB China.
Cleve Steward, Managing Director, International Division, Xtar Sports, “They (HBB) knew the sport, they knew tennis, they knew how to sponsor. And companies who get involved with sports, a lot of the time they just put the money and expect every thing to happen. But they understood
113 that for it to work, they also had to activate it on their side, which is quite an important part of promoting an event and promoting a brand.”
Alex Lee, General Manager, Xtar Sports, “For us, there are many reasons to choose HBB. Firstly, we’ve got money - HBB, as a title sponsor, would invest quite a large amount of money. Secondly, HBB has had experience of operating and sponsoring tennis events in the world. Such experience was what we could never accumulate overnight. We could learn a lot from them…At the same time. Their culture attracted us as well. A culture with a history of more than 300 years attracted us very much. Putting these factors together, you would never choose any other company but HBB.”
Mark Lueno, Executive Director, International Division, Xtar Sports, “HBB is probably one of the best marketing companies in the world…I mean you just have to look all around the world at the commercials they produce and the creative that they do, and the things they involved themselves in are one very, very creative, sometimes cutting edge, very premium. They always do things at a very first class level.”
As evidenced in these interviews, a form of trust is a precondition of the XtarSports- HBB relationship as a way to reduce the perceived risk in the market. The initial trust that Xtar Sports had towards HBB China is largely due to the prior history of the partner firms that are reflected in the resources and reputations both firms possess, which impact both self-perception and beliefs about the partner. The trust that drove the initial relationship building is mainly of calculative nature, motivated by Xtar Sports’ interest in and admiration of resources present in HBB China. However, as Xtar Sports and HBB China began to interact in business and social contexts, Xtar Sports’ calculative trust is complemented by its affective emotion of liking HBB people. Being Americans, Cleve and Mark, who were the key members in Xtar Sports, enjoyed ethnic similarity to the Europeans. Cultural congruency between the two teams emerged which was positively associated to the building of affective trust (McAllister 1995). Such personal- quality-based affective trust strengthens and reinforces the economic and structural bonds (Nicholson, Compeau and Sethi 2001) in future relationship development, but at
114 the inception of the relationship, the affective trust increased Xtar Sports’ acceptability of vulnerability in a brand new relationship with power asymmetry. The confidence of Xtar Sports in HBB China as a reliable partner is easily seen in interviews with senior managers from Xtar Sports.
Cleve Steward, Managing Director, International Division, Xtar Sports, “We knew they (HBB) would be a great sponsor…..Absolutely. Because I know their history and I know their culture. So we had no doubts about them.”
Mark Lueno, Executive Director, International Division, Xtar Sports, “We knew that they (HBB) would help us make the event well-known, help us sell tickets, create the buzz that was totally lacking ever since tennis was being staged in China.”
Research on calculative and affective trust has highlighted the importance of developing interpersonal affect upon a cognitive base in the relationship, because the cognition- based trust is seen as more superficial and less specialized to trustees (Holmes and Remple 1989; Johnson-George and Swap 1982; McAllister 1995). The XtarSports-HBB relationship reveals that affective trust can be superficial and unspecific at the initial stage of a relationship as well, when trust is not based on concrete events and affirmations of goodwill but on the general reputation of a major global firm and personal feelings. Reputation is important but no substitute for experience (Blois 1999). Trust without experience is more like an optimistic hope or wishful thinking, and therefore, it could be untrue and fragile at the initial phase (McKnight, Cummings and Chervany 1998). Evidence of this is detected in the following events.
When negotiating a contract, Xtar Sports insisted on adding a minimum amount of money that HBB China should invest in the event sponsorship. Despite the trust expressed by senior managers in Xtar Sports, Xtar Sports grabbed the chance to increase its legal power in the relationship as a precautionary measure that gave itself a greater sense of security. HBB China’s agreement with the additional term also provided some guarantee of its behavioral commitment (Sharma, Young and Wilkinson 2006) to the relationship with Xtar Sports. As it was not likely for attitudinal
115 commitment (Sharma, Young and Wilkinson 2006) to occur at the inception of such a brand new relationship, the manifestation of the resource commitment from HBB China was an important sign to Xtar Sports that in turn reinforced its trust on HBB China as a professional and reliable partner.
Mark Lueno, Executive Director, International Division, Xtar Sports, “We knew HBB could do it and we knew that they would do it. But it’s better, as we always say that good contracts make good friends. So it was clear from them, here is the amount minimum that you have to spend. It’s clear to us, OK, we have got a good partner.”
While Xtar Sports trusted HBB China as a highly capable company driven by its analysis of the complimentary resources of its partner’s, the trust HBB China placed on Xtar Sports turned out to be much more complicated with both rational and emotional aspects. The trust, first of all, was largely grounded in its confidence in and liking for Mark and Cleve, the two major representatives of Xtar Sports throughout the negotiations. This could explain “even 60% of the whole reason why we (HBB China) said ‘Ok, let’s go for it”, according to Robert Smith, former General Manager of HBB China, who was one of the key members of the panel involved. Back in late 1990s, Xtar Sports did not have sufficient experience in event management, however, Mark and Cleve were seasoned managers in the tennis business with impressive track records. Their professionalism and expertise were manifested in the business presentations as well as throughout the negotiations, where they demonstrated their accurate understanding of the market and commitment to satisfying the client’s needs by delivering all promises.
Derick Beek, former Marketing Director, HBB China, “It is obviously people (that attracted us to the relationship). At the end of the day you work with people, not companies. And a key decision is whether you trust the people you are dealing with. This is number one.”
The efficient communication on business between Mark and Cleve and the senior management in HBB China led to the interest of the HBB team in moving on to more personal friendships with the two Americans. The very charming and pleasant
116 personalities of Mark and Cleve became substantial additions to their professional accreditation. The cultural congruence between the Americans and the European was reflected in their mutual appreciation of straightforwardness, love of social life and similar sense of humor, all of which contributed to boosting the European’s confidence in and like of Mark and Cleve. It was believed by the European managers that there was real chemistry between Mark and Cleve and HBB.
Given that none of the senior managers in HBB China had rich experience in collaborating with Chinese companies in the unique business environment in China, it became critically important for them to work with someone that they could trust, professionally and personally. Therefore, the comfort that the HBB managers had when dealing with Mark and Cleve was valued enormously and the fact that these two Americans would be in charge of the management of the tennis event provided substantial confidence in the HBB team that it was possible to launch the event successfully despite the underdeveloped tennis market in Shanghai at that stage.
The fact that HBB China was attracted into the relationship with Xtar Sports mainly by the experience, expertise and charming personality of its two American employees shows the critical role of people as visible resources assessed by the partner firm. More importantly, it indicates a carryover effect that physical movements of people will transfer personal reputation and expertise into organizational qualities, thus, helping to foster a partner firm’s favorable perception of the company, which facilitates the building of initial organizational trust. This suggests that companies could buy trust to some extent by hiring those with the right credentials.
While the trust in Mark and Cleve became “the key basic ingredient to whether you (HBB China) commit a serious amount of money to something” (Derick Beek, former Marketing Director of HBB China), the business-oriented corporate culture in HBB China indicated that its managers would not let themselves be blindly in love with Mark and Cleve when making the decision of initiating the business with Xtar Sports. As revealed in interviews with former senior managers in HBB China, more factors were considered.
117 Firstly, at that time HBB China had a strategic vision to raise its profile in China, especially in Shanghai, which was perceived as its key market and was looking for appropriate marketing opportunities. Given the long history of sponsoring tennis events around the world, HBB China believed there was a natural link between its beverage brand and tennis, hence, they were attracted by the idea of being a sponsor to an ATP tennis tournament in Shanghai. In this sense, HBB China needed the tennis event more than Xtar Sports as a business partner, therefore, the value of Xtar Sports to HBB China was largely dependent on the value of the event it managed at the inception of the relationship. This is in line with literature that some specific feature in the environment is what makes a certain partner firm so critical (Hakansson and Sharma 1996).
The exclusive resources Xtar Sports possessed led to further thinking about the power structure in the relationship when it was first being formed. The fact that Xtar Sports was the only company authorized to stage the tennis event, which HBB China wanted to use as a platform for its branding campaign in Shanghai, earned Xtar Sports a certain amount of power in the relationship and helped to balance the power structure at the beginning. As it turned out later in the relationship, such dependence of HBB China on Xtar Sports based on the exclusive event would increase as the relationship evolved, as a result of the tennis event developing into a huge success with extraordinary marketing opportunities. This is in line with the power-dependence theories, which argue that, if the comparison level of the alternatives is low, the partner would be more dependent and less likely to leave the relationship (e.g., Emerson 1962; Wilson 1995).
In addition to the personal trust and the value of the tennis event as a unique yet appropriate marketing opportunity in Shanghai, another important factor that influenced the decision of HBB China to collaborate with Xtar Sports was its solid connection with the Shanghai Municipal Government. Learning from its limited experience of working in China, the senior managers in HBB China were already fully aware of the complications of doing business in China and the importance of having the right connections with local government to get business done. The learning of the unique business environment in China had obvious impact on HBB China when selecting business partners. The Eagle Group, the parent company of Xtar Sports, was a very important backup that had extensive Guanxi (meaning business networks) needed to get business done, including a close tie to Shanghai Municipal Government. It managed to
118 get the government involved in the tennis business with promises of commitment and support when needed. Since tennis was only an upcoming sport in China at that time, it was of vital importance to have the endorsement of Shanghai Municipal Government with a genuine focus on making the tennis event a success. The confirmation of the substantial involvement of the government provided HBB China with a secure feeling that Xtar Sports would be able to make the event happen as blueprinted. This finding reveals that a firm’s network position, which characterizes the firm’s relations to other firms, could be a unique resource to attract potential partners. A firm’s network position is a result of the firm’s earlier activities in a network, which indicates potential resources that the firm is able to bring to the focal relationship and the possibility of extending the focal relationship.
As the analysis reveals, an initial trusting environment was being formed in the relationship at this stage, when interactions between Xtar Sports and HBB China began to increase. Trust was a major driving force to initiate the cooperative relationship and was mainly used by the two firms to predict the other’s behavior in the relationship so as to reduce the potential risk of the first-time collaboration. The initial trust that Xtar Sports and HBB China placed on each other was of different nature and structure, reflecting the various paths the companies had gone through that affected their perception of resource values and beliefs in potential partners. The fact that Xtar Sports was a newly-established company with almost nil experience in the industry led to its determination to seek complimentary resources and the expectation of the potential partner as a good source of learning, hence, Xtar Sports was more likely to develop and rely on resource-based calculative trust on HBB China. On the other hand, HBB China, as a seasoned event sponsor, was more specific in what it wanted from the partner firm and resorted to more diversified sources in determining the value of the partner, which resulted in developing both calculative and affective trust. The different nature and structure of trust that HBB China and Xtar Sports held for each other demonstrated how history matters in shaping the initial conditions of trust in a new business relationship. However, regardless of these differences, the trust at the inception of the new relationship, as a whole, was chiefly motivated by interest and admiration but could be less specific towards the particular partner, due to the lack of experiential affirmation of each other’s capability and goodwill. To summarize the discussion in this section, Table
119 6.4 lists the major features of the dynamics of trust in the initial building phase, together with the external, internal and relational environments in which the dynamics occur.
120 Table 6.4 Major features of initial building phase in XtarSports-HBB relationship (1997-early 1998)
External Internal Relational objectives Content of Interaction Dynamics of trust environment environment Trust development Role of trust HBB China: HBB China: HBB China: Majority of interaction occurring in --Initial trust being built --Trust being a driving Emerging beverage Seeking marketing To get the exclusive sponsorship-specific context, coupled mainly as a result of force to initiate the market in China with opportunities in China opportunity of ATP with emerging social interaction second-hand learning, relationship between low level of for branding purposes tennis event between managers from partner firms with calculative trust partner firms competitiveness; sponsorship in --No resource ties being the main Shanghai for brand --Low level of activity links constituent; promotion --Low level of actor bonds --Calculative trust being --Medium level of schema couplings built on the evaluation of resource Xtar Sports: Xtar Sports: Xtar Sports: complimentarity; Undeveloped tennis Newly-established To establish the --Affective trust being market in Shanghai small firm with relationship with HBB built mainly based on with high level of insufficient resources China to gain cultural congruence uncertainty of its own to stage and complimentary between managers from manage the ATP resources and learn partner firms; tennis event from its experience of --Initial trust being less event marketing special and substantial but more of a wishful thinking due to lack to concrete affirmation of partner firms’ capability, benevolence and integrity in the relationship.
121 6.6 Discussion on propositions In Chapter 4, propositions are suggested regarding how the conditions of trust change as a business relationship develops. These propositions are listed in Table 6.5 as follows.
Table 6.5 Summary of propositions
Proposition Description Proposition 1a The history of business relationships affects the resources firms possess, which influence the building of initial trust in a business relationship. Proposition 1b With a lack of concrete experience of interactions between cooperating firms, the visible and tangible resources have a stronger impact on the conditions of trust at the inception of a business relationship. Proposition 2a A firm’s beliefs in a partner firm, based on its resources and prior history of business relationships, impact the conditions of trust at the inception of a business relationship. Proposition 2b A firm’s self-perceptions of its own resources and value system impact its beliefs in a partner firm. Proposition 3 A firm’s intentions and goals for a new relationship, affected by its existing resources and beliefs, have impacts on the conditions of trust at the inception of the business relationship. Proposition 4 As a business relationship develops, a firm’s resources change due to the learning, adapting and interacting taking place. As a result, the nature and extent of trust between partner firms changes over time. Proposition 5 As a business develops, a firm’s beliefs in itself, its partner firm and the value of the relationship change due to learning, adapting and interacting taking place. As a result, the nature and extent of trust between partner firms changes over time. Proposition 6 As a business relationship develops, a firm’s intentions and goals for the relationship change due to the learning, adapting and interacting taking place. As a result, the nature and extent of trust between partner firms changes over time. Proposition 7 As a business relationship matures, trust can reach a dynamic equilibrium whereby its nature and extent does not vary with ongoing interactions but remains stable over time as the learning, adapting and interacting in the relationship produce and reproduce a particular level and kinds of trust. Proposition 8 As a business relationship develops, the nature of trust will become more complex. Cognition-based calculative trust will be complemented by emotion-based affective trust. In turn, these types of trust co-exist and interact to drive relationship development. Proposition 9 When a business relationship terminates, the combination of resources a firm has developed through the relationship influences the initial conditions of trust in future business relationships.
The analysis of the initial building phase reveals that the initial trust developed between partner firms is mainly resource-based, given the lack of experience of cooperation. Xtar Sports’s initial confidence in HBB China as a capable and reliable partner mainly hinges on its financial power, brand reputation and rich experience in sports sponsorship. On the other hand, HBB China is initially attracted by Xtar Sports as a potential partner by its quality employees, close relationship with the local government and the exclusive right of staging the ATP event. All these resources are visible and discernable so that
122 their complimentary values can be evaluated even without sufficient hands-on experience of cooperation. The resources reflect how Xtar Sports and HBB China have been shaped in their history of business development and cooperation with other firms, such as the connection between Xtar Sports and the local municipal government. Their own resource repertories impact the evaluation of the value of resources possessed by the other firm, which lead to the initial beliefs in each other in terms of whether or not the partner firm is able to contribute to the cooperation to achieve mutual goals and benefits. Such beliefs determine the initial conditions of trust developed between partner firms. These findings render support to Propositions 1a, 1b, 2a and 2b.
Proposition 3 states that a firm’s intentions and goals for a new relationship have impacts on the conditions of trust at the inception of the business relationship. The analysis of the initial building phase reveals no strong and clear evidence showing the direct impact of intentions and goals on developing initial trust between Xtar Sports and HBB China. It is not found that Xtar Sports trusts HBB China because it desires to establish a cooperative relationship with it. By the same token, HBB China’s initial trust in Xtar Sports has nothing to do with its relationship objectives, Proposition 3 is thus not supported.
However, the role of partner firms’ intentions and goals is observed in the initial building phase in that they impact the actions and interactions taken by Xtar Sports and HBB China in the relationship. The goals are largely driven by the firm’s existing resources and corporate strategy for its own development, both of which reflect partially the organizational environment within the firm. For example, Xtar Sports’s relational goals of learning from HBB China in terms of event marketing and management are reasonable given its status as a newly-established event management firm with no experience and reputation in the industry. On the other hand, HBB China’s intention of cooperating with Xtar Sports complies with its marketing strategy in 1990s to promote the brand of HBB in China through sports sponsorship. Though their final decision of setting up a new business relationship is made based on their beliefs in the capability of realizing the relationship goals through the partner firm, the focal firms are more motivated to begin the cooperation by the anticipated benefits from a new relationship that are compatible to corporate needs and strategies.
123 This observation unearths that focal firms are impacted by their intentions and goals to take actions that manifest their trust towards each other. The intentions and goals, which are set on the basis of firms’ resources and strategies, encourage or discourage the focal firms to act trustingly in the relationship, such as agreeing to initiate a new business relationship. This finding illuminates the understanding of what constitutes the dynamics of trust in business relationships. First of all, this involves a trusting attitude that develops and changes as a psychological condition responding to actions and interactions in the relationship. Trusting attitudes are affected by beliefs that underlie how trustworthy the partner firm is perceived to be in terms of capability, integrity and benevolence. Propositions 1a, 1b, 2a and 2b are consistent with this argument. On the other hand, trusting actions are another component in the dynamics of trust in business relationships. Trusting actions are partner firms’ strategic responses to a given environment that manifest trusting attitudes that a firm has developed towards its partner, such as HBB China’s agreement to begin a new relationship with Xtar Sports despite its lack of experiences and reputation in the industry. The availability of trusting attitudes is essential to the occurrence of trusting actions but not a guarantee. Trusting attitudes are a disposition that may or may not be acted upon in much the same way that power is a dispositional concept that may or may not be used in many ways to influence others. Trusting actions are decisions partner firms make after considerations of various factors, such as their intentions and goals for the relationship. The distinction between trusting attitude and trusting actions in the dynamics of trust explains the lack of empirical support to Proposition 3, which treats trust as a single-dimensional concept as an attitude only.
The identification of attitudinal and behavioral dimensions of trust suggests that different sets of mechanisms may operate to drive changes in trusting attitudes versus trusting actions. The events taking place in the initial building phase reveal some of these mechanisms, which are discussed in the following section.
6.7 Discussion of mechanisms underlying dynamics of trust Mechanisms are the underlying processes by which things happen. As discussed in Chapter 3, a mechanism is a continuous process involving entities and activities organized such that it is productive of regular changes from start to termination
124 conditions (Bunge 1997; Machamer, Darden and Craver 2000). A mechanism reflects a particular progression of events and their conjunction with other events, therefore, mechanisms should be a systematic statement of connections, contexts and chronicle between and among events (Poole, Van de Ven, Dooley et al. 2000).
Mechanisms underlying dynamics of trust in business relationships drive cognitive, affective and behavioral changes related to trusting attitudes and trusting actions. Cognition, affection and behaviors are concepts that only apply to people, not firms. I agree with the view of Zaheer, McEvily and Perrone (1998) that trust has its basis in individuals, but when individuals in an organization share an orientation toward another organization, interorganizational trust is built. It is nicely put by Zaheer and his colleagues (Zaheer, McEvily and Perrone 1998) that “interorganizational trust describes the extent to which organizational members have a collectively-held trust orientation toward the partner firm” (p143). Following this view, I use the term “firm” in the discussion of mechanisms in this thesis as a shorthand for managers and decision- makers representing their firms in the relationship.
6.7.1 Mechanisms related to trusting attitudes Trust creation is a history-dependent process in which trust accumulates and builds incrementally (Child 2001; Larson 1992). The findings in the initial building phase of the XtarSports-HBB relationship unveil the critical impact of the initial impressions that both firms had of each other on the building of initial trust. The initial impressions reflect the partner firms’ evaluation of the extent to which they believe their counterpart will behave competently and faithfully in the relationship. Partner firms do not yet have hands-on experience of working together, unless they have dealt with each other or some of the people involved before. Initial beliefs and impressions are formed mainly based on what they have learned as a result of prior experience in other relations and the knowledge and perceptions they have developed about each other over time. Previous research shows that one of the factors influencing choice of partners is that they have dealt with each other before (Dacin, Hitt and Levitas 1997; Geringer 1991). The experience and outcomes of prior interactions would have resulted in some direct and indirect learning about the other firm, including intangible elements such as how they do business and tangible elements such as financial capability. Past interactions with people now working for the other firm are also relevant. In short, history matters in
125 setting the stage for future interactions. It affects the predispositions the parties involved come to the relation with.
We could refer to this as some kind of macro mechanism, a historical learning mechanism, whereby history shapes us, after all we are all products of our history. But this is too broad and obscures the workings of many different kinds of mechanisms that underlie, drive and give rise to the events in a firm’s history, including the outcomes and experience of past interactions. These are the same mechanisms I seek to identify by studying the way the focal relation in this case develops and changes over time and how trust develops as a result of these.
History, the mix and order of events over time, shapes what happens as a result of a firm’s learning, growing and resource accumulating processes. Through these types of mechanisms past experiences are filtered into what the firm possesses and believes. This determines what complementary resources the firm seeks from potential partner firms and how the firm evaluates its potential partners. Each firm’s history is unique and its effects are reflected in the notion of path dependence, i.e. history matters in shaping the current firm. Residues of history reside in the resources and beliefs held by firms.
Historical learning mechanisms also operate in information searching processes when a new business relationship is being formed. With a lack of actual experience of cooperation, a firm develops its beliefs in a potential partner and evaluates its value based on second-hand learning about the partner’s resources and its reputation of cooperating with other firms. Davis and Prince (2005) term the trust developed before a relationship is formally established pre-experiential trust. This terminology indicates firms’ dependence on concrete resource value as the basis for initial trust, especially calculative trust. Visible and measurable resources, such as brand reputation and financial competency as possessed by HBB China, could be particularly important as they are obvious to others and can be evaluated straightforwardly. The availability of such knowledge of resources of the partner firm triggers the operation of a formative evaluating mechanism, whereby firms combine their knowledge acquired in the past experience to form an initial impression of the partner firm. Formative evaluating mechanisms represent a sense-making process experienced by firms to make judgments in a rational and conscious way. For instance, HBB China learned from its experience
126 of operating in China how important it was to be well-connected to the government to get the business done. This belief led to its appreciation of the close government relationship developed by Xtar Sports, which became an important reason why HBB China trusted Xtar Sports’s capability of successfully staging the tennis event, despite its lack of experience in sports marketing.
However, the initial trust is not necessarily of a calculative nature exclusively. Goodwill-based affective trust can start to be developing as well. Previous experiences of firms produce carryover effects such as personal relationships between individuals in partner firms (Havila and Wilkinson 2002) as well as firms’ market reputation of fairness and credibility (Anderson and Weitz 1992; Ganesan 1994). In the case of XtarSports-HBB relationship, the global reputation of HBB as an active and popular sports sponsor, especially in tennis, has helped to foster Xtar Sports’ initial trust in HBB as a reliable partner, despite a lack of any experience of formal cooperation between them. This shows that affective trust could be based on feelings and emotions which stem from interpersonal attraction or unconsciously formed judgments of others. One of the mechanisms to explain how these effects on trust are formed is a stereotyping mechanism, which is a particular type of evaluating mechanism triggered by historical learning.
Stereotyping mechanisms partly explain the building of trust at the beginning of a new business relationship. This mechanism refers to a process of evaluating second-hand information gathered by partner firms. In particular, it means that firms are placed into a general category, for example, based on their nationality, ethnicity and culture. When a firm matches a positive stereotype held by its partner firm, the partner firm will quickly form positive beliefs by generalizing from the favorable category into which the trusted firm is placed, which leads to the building of initial trust. The judgment in the partner firm could be unconsciously made in that firms may rely on their feelings and commonsense to reach a conclusion. In the initial building phase of the XtarSports- HBB relationship, stereotyping mechanisms operated to shape the partner firms’ initial beliefs of each other. For instance, the senior managers in HBB China had little experience of working with Chinese firms but responded positively to the two American executives working for Xtar Sports. The common Western ethnic and ideological background of Mark Lueno and Cleve Steward helped enormously in bridging the
127 cultural gap with their European counterparts in HBB China. More importantly, the cultural congruence gave HBB China more confidence in the compatible value system between each other, such as integrity and benevolence. Such impression promoted the cultivation of personal affection in individuals as well as the initial affective trust placed in the partner firm.
The interactions that firms experience when negotiating the setup of a new business relationship, though limited in scope, offer another opportunity for firms to learn about each other, helping to complement or challenge existing beliefs based on second-hand knowledge. This implies the emergence of an experiential learning mechanism in developing initial trust at the inception of a business relationship. However, given the limited scope and scale of interactions between partner firms, experiential learning is not a key mechanism at this phase but expected to be more dominant as the relationship unfolds over time. Therefore, this mechanism will be explained and discussed more thoroughly in the following chapters.
In summary, trust builds and changes when firms go through a mental accounting process (Kahnenman and Tversky 1984) in terms of how they learn, interpret and evaluate each other. At the beginning of a new business, when little information is available about the other party apart from visible resources such as individual and firm reputations, the creation of trust is largely influenced by initial beliefs and impressions (Lewis and Weigert 1985). Historical learning mechanism, as an umbrella term for mechanisms of various kinds operating in the past relationships that drive changes in the firms’ resources and beliefs, shapes the current situation of partner firms. It also characterizes firms’ reliance on the second-hand knowledge and more general biases in learning and evaluating potential partners. Based on this, formative evaluating mechanism and stereotyping mechanism are triggered to impact the shaping of firms’ cognitive and affective beliefs in potential partners, thus, affecting the building of initial conditions of trust in the relationship.
6.7.2 Mechanisms related to trusting actions The most important trusting action occurring in the initial building phase is the focal firms’ agreement to sign a contract that marks the formal establishment of a cooperative relationship. This action is based on the initial trust developed between partner firms at
128 the inception of the relationship. However, the investigation of how this event emerged revealed that it is also a result of a sensemaking process which involves how both firms develop their trusting intention (McKnight, Cummings and Chervany 1998). Karl Weick (1995) defines sensemaking as a process through which actors enlarge small cues as they try to make sense of an unfamiliar situation. This theory has been used to explain and understand various aspects of management and firm behavior (e.g., Adobor 2005) In the context of this discussion, sensemaking is an integrative process whereby firms’ knowledge and experiences are combined and adapted to each other leading to a decision of whether or not they should take trusting actions.
A mixture of psychological, social and economic mechanisms may be identified in the use of trust in the initial building phase. The relational environment at the beginning of the XtarSports-HBB relationship is fledgling and filled with a high level of uncertainty and unpredictability, given the lack of sufficient knowledge and familiarity between partners. The possible existence of a power imbalance due to resource asymmetry could provoke opportunistic behaviors in the relationship (Narayandas and Rangan 2004), further adding to the behavioral uncertainties (Weed and Mitchell 1980) of partner firms in a first-time cooperative relationship. Externally, the underdeveloped tennis market in Shanghai in 1990s poses environmental uncertainty (Weed and Mitchell 1980) in terms of the success of the ATP tennis event to be staged in Shanghai.
The extent of unpredictability of partner firms’ behaviors and the external environment affects the level of risks perceived by firms, which can in part at least be coped with by relying on trust in the other party. Managers are likely to concern themselves more with the trustworthiness of the other party when risks exist in transactions (Huemer 2004b; Ring and Van de Ven 1992; Zaheer, McEvily and Perrone 1998) as it allows interactions to proceed on a more confident basis (Lewis and Weigert 1985; Simmel 1964). This is a form of coping mechanism, a psychological mechanism that influences the trusting firms’ intention to take trusting actions. In the context of business relationships, the coping mechanism refers to the process of how a firm evaluates the level of risk and uncertainty and develops a kind of psychological protection in terms of its perception of the importance of relying on trust to cope. This, in turn, affects the construction of the firm’s intention of proceeding with trusting actions, such as agreeing to initiate a new relationship in this case.
129 The analysis of the initial building phase reveals the role of complementary resources in affecting firms’ attraction. The interest of Xtar Sports and HBB China in initiating a formal relationship is related to the compatibility between the relationship benefits and partner firms’ internal strategies. HBB China was looking for marketing opportunities in sports sponsorship to lift its brand awareness and reputation in China. The tennis event staged by Xtar Sports fit the brand image of HBB, thus, presenting a good chance to implement its marketing strategy. The fact that Xtar Sports was the only firm that had the right to stage the event reinforced HBB China’s desire to cooperate with it. A similar situation existed in the end for Xtar Sports in that HBB China was believed to be a good model to learn from and would help with the development of Xtar Sports. In this way, there was a kind of economic attraction being built due to the meeting of minds (i.e. schema couplings) between the firms resulting from their complementary resources and goals. This attraction did not take place instantly but emerged from a process of initial discussions and appraisals. An evaluating mechanism, which has operated to impact the development of a trusting attitude, is thus identified again but operates in a different context. It involves processes whereby firms are attracted by the benefits of taking trusting actions and get behaviorally ready to do so in business relationships. Evaluating mechanisms can be understood in terms of appraisal theories in psychology (Frijda 1987; Ortony, Clore and Collins 1988; Roseman 1991; Smith and Ellsworth 1985). Appraisal theorists maintain that the critical determinant of any emotional response to an event or environment is the resultant judgment and interpretation arising from comparing the perceived characteristics of an actual state (a potential relationship partner) to a desired state. Primary appraisal concerns whether something of relevance to a personal stake has occurred, i.e. goal relevance (Smith and Lazarus 1990). Only if a personal stake exists in an encounter will there be a response, such as attraction, to what is happening. Another condition for the formation of such responses is goal congruence (Smith and Lazarus 1990), referring to the extent to which an action is consistent or inconsistent to what the person wants. The judgment of the event to determine whether or not it will facilitate or thwart the stake (Bagozzi, Gurhan-Canli and Priester 2002) will promote or hamper the construction of behavioral intentions.
In the context of business relationships, an evaluating mechanism refers to a process whereby firms evaluate their corporate goals and compare them to potential relational
130 benefits in order to determine how relevant, compatible and attractive they are. The rational evaluation of perceived costs and benefits influences firms’ motivation and readiness to proceed with trusting actions, such as starting a new relationship and committing to it. In the case study, the mutual evaluation is more rational than emotional based on complementary resources. Evaluating mechanisms are economic mechanisms involving economic calculation that guides partner firms’ choices and responses to an environment.
There is also a personal emotional attraction of HBB executives to Mark and Cleve because they are perceived as similar to them in terms of cultural stereotypes. As it turned out, this personal emotional attraction is one of the major reasons why HBB China agreed to cooperate with Xtar Sports, indicating the impact of the personal attraction on enhancing the behavioral intention to take trusting actions. Research on human attraction shows that people are attracted to those like themselves and that like tends to marry like (Wilkinson, Young and Freytag 2005). One explanation is that the more similar people are to each other, the easier to reach an agreement. In the context of business relationships, organizations do not act, the individuals representing the organizations do. Therefore, personal liking may lead to “business mating” (Wilkinson, Young and Freytag 2005). When individuals like other individuals in partner firms who are perceived to be similar to them, they may manifest the emotion by committing organizational resources (Narayandas and Rangan 2004), leading to actions on behalf of organizations, such as agreeing to cooperate. This presents another example of the operation of a stereotyping mechanism, which also impacts the development of trusting attitudes. In this occasion, the mechanism refers to the process whereby individuals tend to be attracted by other individuals from the partner firm who have geographic, social and cultural proximity. The personal emotional attraction, in turn, promotes the construction of intentions of bebaving trustingly in the business relationship. Stereotyping mechanism is an emotional mechanism that functions during the course of partner selection when firms rely more on the first sight to choose their business mates.
In summary, a firm’s agreement to initiate a business relationship with a new partner is an intentional trusting action, indicating the firm’s acceptance of the risks involved and a readiness to take the potential outcomes. The decision-making process involves some degree of trust held by cooperating firms as a precondition of a newly established
131 relationship. Three types of mechanisms are identified in the process of trusting intention development, namely, coping, evaluating and stereotyping mechanisms. These mechanisms work separately, following different processes, to impact cooperating firms’ perceived importance of trusting and behavioral readiness to do so. They are active at the beginning of a relationship, when firms do not have much firsthand knowledge to rely on to make decisions. Coping mechanisms and evaluating mechanisms may continue to function throughout relationship evolution, as the environment changes and as cooperating firms constantly adjust their resources, strategies and objectives after learning and growing in the relationship. When the relationship matures, the functioning of these mechanisms affects whether or not the relation continues and other types of trusting actions occur. On the other hand, trust may be activated and used also as a result of other mechanisms. This is now discussed in the following chapters.
132 Chapter 7 Case Analysis of XtarSports-HBB Relationship ---Learning phase (mid 1998-2001)
7.1 Overview The learning phase covers the first few years of the relationship when the HBB Open was the focal and only event that Xtar Sports and HBB China worked closely on. Figure 7.1, which is an excerpt of Phase II from Figure 6.1, presents the general pattern of the relationship development during this phase. There are more links connecting Xtar Sports and HBB China and events related to extra-role behaviors appear in the map for the first time. These signs show that more interaction has taken place in the relationship and closer ties in resources, activities, actors and schemas were formed as the relationship unfolded.
Throughout the years of cooperation, HBB China lived up to the expectations of Xtar Sports in terms of being committed to and professional in sponsorship activation and event promotion, while Xtar Sports also went through an important learning experience that improved its skills for future use. As the relationship moved beyond the initiation stage, the hope for the relationship experience that Xtar Sports and HBB China had at the inception of the relationship transformed into a more real form of trust, based on their actual experience of working with the other to develop and stage the tennis event successfully. Their performance relative to the expectations of the partner firm started to have heavier influence on the strength of the relationship at this stage (Narayandas and Rangan 2004) .
133 Figure 7.1 Summary chart for XtarSports-HBB learning phase (mid 1998-2001)
InE/X/R InE/H/Strat
OC/RES1
FFS/X HCP1/I FFA/X
OC/Perf(+)
FFA/H ExE/TMkt(+)
TP4/A FFS/X XCP1/S InE/X/R InE/H/Strat
FFA/X FFI/Soc(+) FFA/X FFI/Biz FFA/X InE/X/Org
ReE/Ppr FFA/H/ExR FFA/X/ExR FFA/H FFA/X/ExR FFA/H/ExR
OC/RES2
Environmental factors Process: InE: internal environment I: interaction ExE: external environment A: activity ReE: relational environment R: resource Strat: strategy S: schema TMkt: tennis market ExR: extra role BMkt: beer market Soc: social Org: organizational structure Biz: business Ppl: personnel structure Ppr: personal relationship Outcome: Pwr: power structure OC: outcome Perf: performance Actor: RES: relationship evolutionary status H: HBB X: Xtar Sports Links and symbols: TP: third party Sequential link XCP: party connected to Xtar Sports Transformative link HCP: party connected to HBB + positive/more FF: focal firm - negative/less
134 7.2 External environment The tennis market in Shanghai was underdeveloped when the HBB Open was first staged in 1998, with only thousands attending the tennis event. However, the year 1998 marked a starting point for the rapid development of tennis in Shanghai in the following years. A market survey in 1998 ranked tennis as the sport with the greatest potential in Shanghai, even though it was not as popular as soccer or basketball yet. Since 1998, the average growth rate of the tennis playing population in Shanghai is 22.68%, which peaked in 2000 with a growth rate of 36.28% (Research Center of Event Statistics 2006) .
Much credit should go to the success of the HBB Open, which raised public awareness of and interest in tennis by inviting world-famous tennis players to the annual event. Other efforts were made by the government and businesses to further develop tennis in Shanghai, including building up tennis facilities and offering to the market varieties of tennis-related products and services. More tennis courts were constructed in sports gyms and residential complexes, and tennis clubs were established with training programs introduced especially to the young generation. One of the most influential clubs was the youth tennis club invested in by the Eagle Group in 2000 in cooperation with the National Tennis Sports Management Center. It aimed to further boost tennis by offering high-quality training programs to young tennis talent for future professional events.
The fast-developing market ushers in not only opportunities for Xtar Sports but challenges as well. When the HBB Open was further developed and improved as years went by, the tennis audience grew with the event to be more mature and knowledgeable about the sport, constantly elevating their expectations. As a result, although the HBB Open was a market success, Xtar Sports felt more pressured than relieved by the emerging demand for high-quality tennis events. The challenge imposed by the developing market became an external motivating factor for Xtar Sports to learn and adjust fast and efficiently so as to improve the quality of the HBB Open. It also triggered Xtar Sports’ efforts to search for more prestigious events to be introduced to Shanghai, one of which later turned out to be the Tennis Masters Cup.
135 Alex Lee, General Manager, Xtar Sports, “Shanghai is a different place from others. It is a rapidly growing and improving city, where people are exposed to various cultural and sports events. The number is constantly increasing. So the biggest difference between staging an event in Shanghai and in other cities is that we have to use much less time than others do to improve the event.”
While the tennis market in Shanghai was booming, the market performance of HBB beverages was progressing as well. In 1998, the sales of HBB products in Shanghai increased by 30% during the promotional period of the tennis event. A consumer survey conducted at the end of the event reported strong recognition of the HBB brand among consumers. Despite the premium price for its beverage, HBB was widely perceived by local consumers as a prestigious foreign brand with quality products. In the overall market in China, the biggest market share for HBB products came from South China. “The sales (in South China) went up to such a high level that we thought it was not realistic any more, really, because you were an import beverage and it was five times more expensive than the local products.” (Joe Spain, former Marketing Director for HBB China)
The sales of HBB products in the Chinese market peaked in the year 2000 but began to drop in 2001. This could be explained by various things, the most important of which was the increasingly fierce competition among international and domestic beverage brands from 2000. The early 1990s saw international brands tapping the Chinese market only to sell up and even move out later when they found the market conditions in China too difficult and regulations too cumbersome. But 10 years later when the economy was expanding rapidly in China, the rush was on again and foreign beverage companies came back to make big money by acquiring, merging and partnering with local firms. The determination of these brands to grab market share with aggressive marketing efforts represented serious challenges to HBB China. But foreign brands were not the only competition. Their local counterparts have also intensified efforts to consolidate their market positions. For example, in 2001, Haitao, the largest beverage company in China, announced that it would introduce a new line of beverage in Beijing and compete head on with foreign giants such as HBB.
136 Given that the HBB Open, at that time, was the biggest opportunity for HBB China for its branding and promotions in China, the decline in sales could have affected HBB China’s expectations regarding the return from its marketing investment in the sponsorship program, which, in consequence, would affect its expectations of Xtar Sports and the relationship with it.
7.3 Internal environment Being a very small firm with less than 10 employees, Xtar Sports did not have any business divisions in the early years but all people were working in the same group with different responsibilities. This non-hierarchical organizational structure resulted in easy and close internal communication. After HBB China became the title sponsor to the event, all staff in Xtar Sports were involved in serving this chief client. Sometimes the whole company went out for a meeting with HBB China, as recalled by Peter Yan, Deputy General Manager of Xtar Sports in the interview.
Peter Yan, Deputy General Manager, Xtar Sports, “In fact our company was very small in size in 1998 without much hierarchy. Usually before a big event or meetings, everyone, including the General Manager, would be in close communication with HBB China. Almost all staff in Xtar Sports would attend meetings with HBB China at that time.”
The HBB Open developed well from when it was first staged in 1998 and expanded in its scale and scope over the years. Xtar Sports gained more professional experience in event management and realized the importance of growing the company and restructuring the organization for more efficient operation. In addition to some small- scale recruitment from 1999, Xtar Sports had an initial idea of setting up business divisions in the company. This came as an outcome of a critical event occurring in 2000.
Since the first year of the HBB Open, a professional public relations agency had been hired to promote the event, as insisted on by HBB China. The cost was equally shared by the two firms. In 2000, the PR agency failed to propose a working plan for a road show, as requested by Xtar Sports and HBB China. The reason claimed by the agency was that it had used up all the working hours paid by the client. With the road show
137 only one week ahead, the Marketing Director of HBB China was very angry at the agency. At this moment, Alex Lee, who was then the executive assistant to the General Manager of Xtar Sports, took over the responsibility and ticked off the whole to-do list. HBB China was highly satisfied by what Xtar Sports did and decided to let Xtar Sports manage its marketing budget. Furthermore, HBB China was no longer insistent on hiring an external PR agency to promote the HBB Open from that year on. This was encouraging to Xtar Sports, but meanwhile, it realized that the company was in the straitjacket of an inefficiently-designed organizational structure. A blueprint for restructuring the company was worked out soon afterwards. However, it was not fully executed until 2002, since Xtar Sports could not afford to hire enough staff for each division. An external PR agency was hired again for the event in 2001.
It is also during the course of this learning phase that Xtar Sports expanded and deepened its business network. Its relationship with the Shanghai Municipal Government became closer, as the government was quite happy with the success of the HBB Open and the way it drove rapid development of the tennis market in Shanghai. As the HBB Open became a well-reputed tennis event after the initial years of operation, more companies were interested in sponsoring the event and Xtar Sports started to cooperate with more clients as event sponsors at different levels. However, the expansion of the business network of Xtar Sports did not impact much on its perception of HBB China in the relationship during this phase, the major reason being that HBB China remained the title sponsor and the management of the HBB Open was still the focal business for Xtar Sports in these years. Nevertheless, the extensive network and healthy reputation that Xtar Sports built during this phase laid solid ground for it to enter into new businesses in the years to follow.
While Xtar Sports was pondering the matter of corporate restructuring, HBB China was experiencing internal structural changes as well. Developed from the representative office of HBB in Shanghai, HBB Trading (Shanghai) Corp. (HTC) was set up in 2000 as the subsidiary to HBB in mainland China, to be in charge of the import and sales of HBB products in China. The establishment of HTC in Shanghai heralded the move of HBB China Headquarters from Hongkong to Shanghai in 2001. These changes pointed to the fact that Shanghai was taken by HBB China as its key market in China and deserved substantial marketing efforts.
138 7.4 Process of interaction in the relationship With the 1+2 contract signed by HBB China, the first year of cooperation was a potentially fragile stage in the relationship because HBB China could end the relationship relatively easily. Therefore, Xtar Sports set its initial short-term goal of keeping its client in the relationship and getting it to continue the contract at the end of the first year. Guided by this objective, Xtar Sports was very careful in cooperating with HBB China and tried to satisfy it by all means. To make up for the lack of experience in event management, Xtar Sports was requested by HBB China to hire 6 foreign professional agencies, including a PR agency, to manage different aspects of event promotion and management. Regular meetings were held between Xtar Sports and HBB China to discuss every aspect of the marketing plan, but, being the title sponsor, HBB China reserved the right of final approval on all marketing decisions, including marketing strategies, selection of star players, media plans and creative design. The position of the title sponsor gave HBB China strong legal power in the relationship to influence Xtar Sports, together with the expert power stemming from its incomparable sports marketing experience. However, during the cooperation, HBB China gave much feedback to Xtar Sports to help with its marketing and client services. Xtar Sports regarded HBB China as the lead firm and viewed itself as its marketing agency in the relation. With a lack of knowledge in event marketing and management, Xtar Sports used this experience as a valuable opportunity for learning. The learning took place on both business and personal levels. Businesswise, Xtar Sports was coached by HBB China in aspects of event marketing. At the same time, Xtar Sports also learned enormously in cooperating with various professional agencies, as its staff worked closely with those agencies and gained first-hand knowledge, which was highly valued in the following years. Personwise, Xtar Sports people knew more of their HBB colleagues in terms of their personality, business ethics and cultural background. When familarity was being built, the respect and friendship with the HBB China team were being promoted as well.
Alex Lee, General Manager, Xtar Sports, “Of course we learned much (in the first year). Because our company is not a marketing firm…we didn’t know how marketing was done. While we were cooperating with
139 HBB China, we could observe the process, e.g., how to control the overall quality of the event, how to control the quality of gifts, what is the whole process of the event operation, how to deal with 4A advertising agencies. All these were what we’ve never got the exposure to before, but we got exposed to all these stuff during the cooperation with HBB China…In this process, as newbies who just joined this industry, we of course have learned a lot, not only about the event operation but also the marketing procedures from HBB China. We’ve benefited a lot from this.”
Cleve Steward, Managing Director, International Division, Xtar Sports, “The first year, I think, everybody was sort of like dating. You are trying to figure out what the other person likes and doesn’t like and then as you get closer and closer and you get into marriage and then you sort of settle down…you are going to be married so you are going to be together a long time, so you have to figure out how to work together.”
An event worth noticing occurred at a press conference before the semi-final at the first HBB Open. There had been much positive feedback from HBB China in terms of the pleasant experience of cooperating with Xtar Sports as well as the effectiveness of the sponsorship program. During the cocktail time at the press conference, Mr. Lesley Wong, Chairman of the Eagle Group, the parent company of Xtar Sports, asked Mr. Derick Beek, then Marketing Director of HBB China, if they would renew the contract for another two years. To the surprise of Mr. Wong, Mr. Beek refused to answer it but insisted that he would not make any decision until receiving a formal evaluation report from an external international agency. The response was evidence of HBB China’s professionalism and respect for the spirit of fair play. They did not mix business interests with personal emotions. The awareness of this corporate culture of HBB China helped Xtar Sports to understand the business manner of its client better and later led it to adjust its own communication strategy in the relationship to be candid and straight- forward with its needs and requests.
Behind the business-oriented corporate culture of HBB China is its deep-rooted philosophy that a formal business relationship means serious money and big commitment. This may explain why HBB China was extremely scrupulous in selecting
140 its partner for a new business relationship in the case of Xtar Sports. However, once the relationship was formed, HBB China cared about it, especially when the relationship with Xtar Sports meant a million US dollars spent on the three-year sponsorship program, which was a large marketing investment by HBB’s standards. Nevertheless, managers in HBB China realized in its early experience in sports sponsorship that it was unlikely for a brand new event to be fully-fledged, therefore, they were ready to take a few years to work on the event together with Xtar Sports. The three-year contract implied HBB’s intention for a long-term relationship with Xtar Sports.
Derick Beek, former Marketing Director, HBB China, “I think we aimed at the second and third year, where the event would get progressively a bit better and a little bit more popular and (with) a bit higher attendance …We had the understanding that to build a really first-class tennis tournament is not something that you can do in one year. (It) is something that takes time.”
The first year in the contract was a critical trial period for HBB China. The survival in the short term was the first condition for HBB China’s further engagement in a long- term relationship. Its expectation of Xtar Sports for the first year was practically simple, i.e. to execute the tennis event successfully and to realize the title sponsorship rights in full as agreed in the contract. HBB China was driven by the goal to work closely with Xtar Sports to make the event happen and succeed. But on the other hand, the fact that HBB China had only a sales representative office in Shanghai and was short-staffed, provided another motivation for its full commitment to the event. After all, it was the biggest marketing project for HBB China at that time. Consistent with Xtar Sports’ observation, HBB China was regarding Xtar Sports as its marketing team to implement its branding strategy. This illustrates how a business relationship could be a means of extending a focal firm’s resource base by allowing access and use of resources from the partner firm (Halinen, Salmi and Havila 1999; Turnbull, Ford and Cunningham 1996).
The cooperation in the first year was smooth and uneventful. There had been some disagreement and issues to solve, but managers in HBB China understood them as normal in any business relationship. In the end, HBB China did not tick off all its goals
141 including media exposure and attendance rate, however, what was delivered was very close to expectations, hence, being an acceptable outcome to HBB China.
The first year of working with Xtar Sports had been a crucial learning experience for HBB China, the output of which exercised long-term influence on the future relationship. As recalled by former senior managers in HBB China, they had learned two important things. Firstly, they confirmed their initial perception of Mark and Cleve as two very capable event managers and believed they were a major element for the success of the tennis event. Accordingly, their reliance on Mark and Cleve increased in future cooperation. Secondly, managers in HBB China realized how important they were to Xtar Sports and to the tennis event as explicitly expressed by Mark, Cleve and other Xtar Sports managers. Without the contribution of HBB China, the event would not have been possible in Shanghai. The knowledge of its vital importance to Xtar Sports put more responsibility on the shoulders of HBB China to work more closely with Xtar Sports to make the tennis event happen and succeed.
Even though the event failed to reach its breakeven point in 1998, the HBB Open in that year was still seen as a success. The event was awarded The Best New Event of the Year by ATP. Xtar Sports achieved its initial goal of learning substantially from working with HBB China on event marketing and the joint effort successfully boosted the tennis market in Shanghai. On the other hand, HBB China received satisfactory results from its sponsorship investment as well. The evaluation report from the Sponsorship Department in HBB showed that the market in Shanghai responded positively to HBB China being the title sponsor. Brand recognition was improved and the sales of HBB products increased by 30% during the period of event promotion. At the end of 1998, HBB China continued the contract for another two years.
The renewal of the contract drove Xtar Sports to adjust its relational goals. It shifted its focus to developing a long-term relationship with HBB, as well as growing its own business by extending the scope of the event.
Alex Lee, General Manager, Xtar Sports, “We no longer viewed HBB China as a major source of financial support….we would take it as a
142 family member …We also needed to further develop our own business, so we should try to upgrade the event.”
Mark Lueno, Executive Director, International Division, Xtar Sports, “Just to get them signed on for the next year. In our business, the only sponsorships that work or events that work are long term. We had a long view back in early days…so the expectation was, from our side, if we do a good job, HBB China will be renewing.”
The adjusted goal to continue the relationship into a long term one drove further commitment of Xtar Sports to the relationship, as indicated in the changes in the actions of Xtar Sports as well as in the interaction between the two firms. Xtar Sports was motivated to learn more and faster to keep up with the growth of the tennis market. As the tennis audience became better-educated about the sport and demanded higher- quality events, Xtar Sports began to consider the future of the HBB Open and started to seek different possible opportunities for future development. One noticeable effort was that it sent a delegation of senior managers from Xtar Sports and the Eagle Group to Germany on a study tour to the Tennis Masters Cup in 1999. This tour turned out to be an eye-opening experience for the delegates; they gained much knowledge of the prestige and business value of the Tennis Masters Cup, which is a higher-rank ATP tournament. But the influence of this experience on the relationship was not apparent until years later when Xtar Sports decided to bid for the hosting right for the Tennis Masters Cup in Shanghai as a stepping stone for its further development. This thus illustrates the delayed effects of events on a relationship.
In contrast to Xtar Sports’ clear expectation of its partner firm and well-defined objectives for the relationship, HBB China did not know exactly what to expect out of the relationship when it first started, due to the lack of experience of doing business in China and working with Xtar Sports. However, after a few years in the relationship, HBB China had better knowledge of what its partner was capable of doing and what it could get out of the event. It didn’t really change its practical goals for the relationship, that the event could get progressively better and more popular with a higher attendance rate and media exposure. But the hands-on experience of cooperation allowed HBB China to exploit the event better for its own marketing purpose. Based on what was
143 learned in the previous year, there would always be more merchandising, more PR activities, more in-store promotion and more spin-off events in the next year. The first three years of the contract represented a unique and fulfilling learning experience for HBB China leading to its future interest in extending the scope of the relationship into new areas.
Joe Spain, former Marketing Director, HBB China, “The first three years were quite well painted. It painted out where to go and how to go about it. We were very much developed during those years. It’s always that in the first year, you can’t do everything in one time, but you learned and the next year there was more merchandising, more PR and more spin-off events, etc…There was a real development in the positive way of really exploiting the event for our visibility purposes.”
The adjusted goals of both partner firms led to an extended scope of interaction in the relationship. Xtar Sports fixed things in general, including improving transportation and security, expanding the television coverage and running more promotion. HBB China was supportive all the time, giving feedback and advice, contributing its resources and channels for promotion activities and even offering extra budget to Xtar Sports for a larger-scale event marketing campaign. Resource ties and activity links became closer and tighter.
In the following years, the HBB Open improved its market performance and yielded satisfying results for both parties. As already noted, the sales of HBB increased every year and reached its peak in 2000. The successful operation of the HBB Open built the brand of the tennis event in the market and more importantly, it gained Xtar Sports brand reputation in the industry and a closer relationship with the Shanghai Municipal Government, which was happy with the constructive role of the HBB Open in developing the local market for tennis. The local government was encouraged by the success of the HBB Open and was ready to be more committed. In 2001, the government invested 1.5 million US dollars to build a retractable roof in Xianxia Tennis Center to make it an all-weather stadium, after the finals of the HBB Open for the first three years were all rained out and had to be postponed. The HBB Open in 2001 was awarded the Best Event of the Year by ATP, which is one of the most esteemed awards
144 in ATP. The award was a statement of the respect and acknowledgement from the players and the authoritative bodies in tennis sports for the event. Meanwhile, it would also bring benefits to the brand of HBB with its association to the event.
The winning of the ATP award, together with the fact that Xtar Sports was able to get generous support from the local government, were seen by HBB China as positive signs that it had chosen the right partner in China. This was of particular value to HBB China. Given the distinct business environment in China, where finding a reliable partner could be more difficult than in developed countries, HBB China reaffirmed its interest in continuing the relationship with Xtar Sports.
Alan White, former Managing Director, HBB China, “You have to always confirm in the countries like China you find a partner where you are happy and able to translate what you want into making it happen. I think that is the strength of our relationship with Xtar Sports, because if you look at the fact that the HBB Open has won many prizes in the world of tennis, it indicates that the tournament is very well respected by the players and organization. Well that is what it is all about. That always has a benefit also for the HBB brand. I think that is the basis of the success of the relationship. If that was not there, it could have been totally different. So I believe yes that is what I found very strong partnership and that you want to understand each other and making it happen.”
Between 1999 and 2001, HBB China sponsored HBB Beat, an annual international music event in Beijing, in cooperation with Seeds Event Management (Seeds) based in Beijing. HBB Beat was another major event incorporated into the overall branding campaign in the Chinese market by HBB China. Being a local firm, Seeds was one of the biggest PR agencies in Beijing with extensive connections with the local government, a resource that HBB China truly treasured. However, working with this corporation turned out to be a rather difficult experience for managers in HBB China, largely because of communication problems. Despite the close and friendly contact between the staff in HBB Beijing office and those from Seeds, things did not develop smoothly on the business side as the HBB team could not understand what would
145 happen and how things were working. This was not considered to be caused by language barriers but more of a conflict between different corporate cultures and working manners. The lack of transparency in this relationship gave HBB China a sense of loss of control over its own event, not knowing what was going on and what was behind the scenes. This required HBB managers to put more time and effort into the event management process to make sure things were arranged properly. Given that HBB China only had a very small marketing team based in Hongkong, the inefficient operation in the relationship with Seeds added an unexpectedly heavy workload on HBB China. The relationship ended in 2001, together with the termination of the event itself.
The effect of the unpleasant experience in the business relationship with Seeds didn’t end with the relationship itself but rather, stretched over to the relationship between HBB China and Xtar Sports. HBB China increased its appreciation for the open and transparent working environment that Xtar Sports helped to build, where it was constantly informed and updated regarding how the event was being managed, including the difficulties and problems Xtar Sports encountered. Realizing that it was not a common experience in China, HBB China increased its respect for Xtar Sports’ candidness and professionalism. In addition, the grueling working experience with Seeds also awakened HBB China to realize the important role of Mark and Cleve as coordinators between the European team in HBB China and the Chinese team in Xtar Sports. The communication with the Chinese in Xtar Sports had become much easier and smoother for HBB managers when Mark and Cleve worked as buffers between the two sharply different cultures. Before joining Xtar Sports, Mark and Cleve had been working in different countries and regions, such as Hongkong, where they gained rich experience of cross-cultural communication and management. This has helped them to understand better the cultural differences between HBB China and Xtar Sports, and play a better role in coordinating between the two firms to bridge the gaps and avoid conflicts. In brief, HBB China’s experience in the connected relationship with Seeds substantiated its schema couplings with Xtar Sports in the focal relationship.
Joe Spain, former Marketing Director, HBB China, “I think in the relationship with Xtar Sports, at least for us it was transparent, because we could really trust Mark and Cleve. Even though sometimes they had
146 difficulties or they had things that they could or could not arrange, we would know. It was more open. But in Beijing, we would never know. It was always in the last minute that we would find out what’s on.”
While working closely on the HBB Open, the two partner firms also began to interact in other contexts beyond the sponsorship program. Xtar Sports took the initiative to discuss with HBB China its own corporate strategy and business development plan. This activity was viewed by Xtar Sports as an effort to steer the relationship towards a partnership, in line with their overall goal for the relation. However, a more important phenomenon in this phase of the relationship is the rapid development of personal relationships between the managers in the two firms, influenced by the long-term orientation of the business relationship. In 1999, a delegation of senior managers and officials from Xtar Sports, the Eagle Group and the Shanghai Sports Bureau was invited by HBB to its global headquarters in Europe, where they were introduced to the senior management team. In return, Xtar Sports invited HBB managers from Europe to a trip to Hong Kong. Informal interactions with HBB senior managers promoted Xtar Sports’ understanding of HBB’s business and its long-term commitment to sports sponsorship. More critically, it bred familiarity that helped to build close personal relationships between the management teams and led to greater liking. The affection of Xtar Sports towards HBB increased dramatically, further strengthening Xtar Sports’ belief that HBB China was a good partner and reaffirming its determination to developing a long-term cooperative tie with it. From the perspective of HBB China, when more people at different management levels of its company got to know Xtar Sports, some of whom became engaged in regular contact with Xtar Sports, the involvement of HBB in the relationship with Xtar Sports grew more extensive and deeper. This signaled the importance of Xtar Sports to HBB, providing a base for future expansion of the scope of cooperation. In addition, Xtar Sports began to know how valuable it was to its partner and was more confident that it could deliver.
Mark Lueno, Executive Director, International Division, Xtar Sports, “What really happened between year 2 and 3 is that we became very close friends, personally … I think if we learned anything, it certainly was that we always want to do better for these guys (from HBB), because
147 we really love them. We know that they are going to be a fantastic partner.”
Xtar Sports and HBB China were bound together more closely out of these intensified social interactions. However, the impact of personal relationships on the development of XtarSports-HBB relation did not emerge immediately. As the relation further unfolded, the existence of personal ties turned out to be helpful to open up dialogues between the two firms, especially when things went wrong. Two critical events occurring during this phase provide evidence of this.
With the booming tennis market in Shanghai from 1998, the Shanghai Sports Bureau and Eagle Group asked Xtar Sports to take the next logical step to introduce more tennis events to Shanghai. In 2000, Xtar Sports purchased a women’s tennis franchise from the Women’s Tennis Association (WTA)---a tier-4 low-level prize money event. Xtar Sports approached HBB China and asked if it would be interested in being a sponsor for the event. Since women were not an appropriate demographic market for its product in China at that time, HBB China rejected the proposal. However, Xtar Sports was not able to sell the sponsorship in the end and turned to HBB China again for help. HBB China agreed and became the official beverage supplier for the event. As the women’s event in 2000 was in the same week as the HBB Open, HBB China increased its investment in sponsorship for that year.
Another significant event took place in early 2001, when sales of HBB products began to drop in China. In an informal conversation, the sales people in HBB China asked if Xtar Sports could assist with its sales as they had to sell a few hundred more crates to reach the annual sales goal. Xtar Sports approached the Eagle Group and persuaded it to purchase HBB products as the New Year’s gift to its thousands of employees.
These two events showed how personal relationship had helped to smooth the communication between Xtar Sports and HBB China, especially at difficult times, and to create new business opportunities for partner firms. It was easier and quicker to get business done without too much formality when personal friendship was established. However, the former event suggested again the business-oriented corporate culture in HBB China; it would not allow the existence of personal ties to interfere with its
148 business decision. Xtar Sports learned this and adjusted its management style accordingly. During the negotiation to renew the contract when it ended in 2000, HBB China tried to bring down its investment without losing much of its title sponsorship rights. However, the efforts to economize the sponsorship didn’t succeed. In the end, HBB China even had to pay more than a million for the new contract with a revised package of sponsorship benefits.
The above-discussed events show that the relationship had evolved to be a mutually cooperative one where both firms make contributions to the benefit of each other. Compared to the situation at the beginning of the relationship, when Xtar Sports possessed limited resources and had to rely heavily on HBB China in event marketing, Xtar Sports had grown its resource base as the relationship developed, which allowed it to make substantial contributions to the relationship. In light of this, the interdependence between Xtar Sports and HBB China was enhanced, and the power structure became more balanced.
But the significance of the two events goes far beyond its impact on the power structure in the relationship. As noted earlier, these events initiated a transition in the nature of the relation from a simple buyer-seller sponsorship relationship to a more sophisticated partnership, as the firms go well beyond the contractual obligations of the sponsorship. The relationship was strengthened when both parties were able to offer support when needed.
Alan White, former Managing Director, HBB China, “That (sponsoring WTA) was only one time off and we did it based on our relationship with them and the flexibility of each party towards each other. We were able to give them some support in that one as they had a financial gap. That is how we look at partnership.”
Joe Spain, former Marketing Director, HBB China, “When I first met them (Xtar Sports people), I didn’t know what to expect. But in a few years of working together, I think that they managed our business much better and we exploited the event much more. We got much more out of it in every way, and I think they’ve helped us a lot…So in every way,
149 they gave us lots of support and we gave them support as well, if they needed anything.”
Mark Lueno, Executive Director, International Division, Xtar Sports, “They (HBB China) were partners, as I said. This relationship is much more like…it became more a partnership…So it’s really a close bond…We are certainly from top to bottom people (who) recognize that this is more than just a title sponsorship.”
The consolidated relationship reinforced Xtar Sports’ determination to sustain a long- term relationship with HBB China, which could be reflected in Xtar Sports’ efforts of keeping HBB China in the relationship when it decided to bid for the Tennis Masters Cup (TMC) in 2001.
After many years with the HBB Open, which is a low-level ATP event, the tennis audience in Shanghai had developed higher expectations and possibly began to get bored by the same event every year. Driven by these changes in the market, Xtar Sports was seeking opportunities to upgrade the tennis event in 2001. Another important motivating force to stage a more esteemed international tennis event in Shanghai was from the local government. When the relationship between Xtar Sports and HBB China developed over time, Xtar Sports’ relation with the local government progressed as well. This meant continuing substantial government support for Xtar Sports and the tennis event (such as the investment on a retractable roof over Xian Xia Stadium in 2001 to solve the problem of weather interference) as well as an increasing impact on the XtarSports-HBB relation. In 2000, supported by the Chinese Central Government, the Shanghai Municipal Government decided to bid for the hosting right of the World Expo in 2010. To enhance the chance of success in the bidding, the local government needed to showcase its capability of organizing large-scale international events as well as to lift the brand image of Shanghai in the world. Therefore, it asked Xtar Sports if it could upgrade the HBB Open to a higher-ranked ATP event to support the application for the World Expo.
At that time, Cleve Steward, Managing Director of International Division in Xtar Sports, was on the ATP council for the men’s tennis tour, so he understood where opportunities
150 were. He recommended the Tennis Masters Cup to Xtar Sports. The management in Xtar Sports and the Eagle Group as well as the government officials had learned about the scope and reputation of the Tennis Masters Cup during the trip to Germany back in 1999, so the proposal to bid for the hosting right of this event was soon approved internally. Similar to the situation in 1997 when the Eagle Group purchased the ATP franchise for the HBB Open, this time the municipal government in Shanghai promised again to fully support the application and offered its resources when needed to assist the event operation if the bidding was successful.
While the decision to bid for the Tennis Masters Cup was made quickly, Xtar Sports had more to consider regarding its partner, HBB China. Convinced that it was unreasonable to stage two ATP events in Shanghai in the same year, Xtar Sports decided to replace the HBB Open with the Tennis Masters Cup if the bidding succeeded. This decision was difficult, not strategically but emotionally. Before the bidding started, Xtar Sports informed HBB China that it planned to stage the Tennis Masters Cup in Shanghai and would like HBB China to become a sponsor to the new event. This action was taken with two aims. First, in the years without the Tennis Masters Cup, Xtar Sports would still operate the HBB Open. The last thing Xtar Sports wanted was to lose HBB China as the title sponsor to HBB Open, after years of successful and pleasant cooperation. Secondly, Xtar Sports regarded HBB China as an excellent client and the relationship as a partnership. It attempted to keep HBB China in the relationship by offering opportunities for mutual development. Given the scale and scope of the Tennis Masters Cup, Xtar Sports believed that it would be in the interests of HBB China to be associated with such a prestigious brand of tennis event.
Cleve Steward, Managing Director, International Division, Xtar Sports, “…the HBB Open appealed to a very small market, mostly Shanghai and China. But when you do the Masters Cup, you become a worldwide event and certainly much bigger television, much bigger profile and a lot more stars and more prestige…it was a very good stepping stone for them (HBB China).”
The decision by HBB China to be a sponsor of the Tennis Masters Cup did not come easily. The senior managers understood that it was important for Shanghai to upgrade
151 the tennis event to the level of the Tennis Masters Cup. However, HBB China would lose its brand power in the TMC, as it was financially impossible for the company to be an exclusive title sponsor to the new event. In addition, the declining sales of HBB products in the local market had reduced the enthusiasm of HBB Headquarters for tennis sponsorship in the region, especially when HBB China would lose its exclusive rights as the title sponsor in the new event. There had been very difficult discussion in HBB China and HBB Headquarters on whether it should continue its involvement in the tennis event in Shanghai and what it could get back from sponsoring the TMC.
Joe Spain, former Marketing Director, HBB China, “For them (Xtar Sports) and for Shanghai, it (having the TMC) was a positive thing. For us, it maybe came too early. It would have been great for us to have the same tournament (the HBB Open) for another three years or something. I think that would be good. We were not a company that strong or that big that could take on the whole Masters Series and sponsor it completely, you know, in a way of putting millions into it…So we had, especially internally in HBB Headquarters, a very difficult discussion.”
The rounds of discussion between HBB China and its Headquarters in Europe finally ended up with an agreement to continue the sponsorship in the TMC. The decision was made based on a few facts. First of all, Shanghai was a key region in the strategic map of HBB China to develop its brand throughout the nation, therefore, the company needed a big event in Shanghai for brand visibility and image building. Tennis remained an appropriate sport for HBB to be associated with. Secondly, HBB China did a thorough evaluation of the marketing efficiency of the HBB Open in the past years. The evaluation discovered that the HBB Open, being the first and only international tennis event in China at that time, had generated significant marketing value by building an important link between the HBB brand and the tennis event. The event was the right fit for the HBB brand, helping to portray a cosmopolitan and modern brand image. The positive conclusion in the evaluation report convinced not only the management team in HBB China but also those in the Headquarters in Europe. Being aware that the TMC was a more professional and influential event with more star players, HBB China believed it was beneficial for it to sponsor the event for its long-term business development in China. Thirdly, though not the major convincing factor, the emotional
152 bond, which had been built between the senior managers in HBB China and Mark and Cleve in Xtar Sports since the very first day of cooperation, created a desire in HBB China to remain connected with Xtar Sports. This was explicitly mentioned by Robert Smith, former Managing Director of HBB China, who was one of the key decision- makers at that time, “There is of course, I think, the emotional bond that we’ve been there since the very first day. And that creates sort of desire to connect.”
While HBB China was in intensive discussion with its Headquarters in Europe over the continuation of its tennis sponsorship in Shanghai, the communication with Xtar Sports was open and constant as well. The senior managers in HBB China were frank enough to voice their doubts and concerns about sponsoring the TMC, and Xtar Sports assisted with information collection for the evaluation report submitted to the HBB Headquarters. After a number of conversations, managers in HBB China were convinced by the marketing power of the TMC and believed it was the right direction for further development. As a result, HBB China proposed to be a founding sponsor to the TMC.
Despite the desire to develop long-term relationship with HBB China and the existence of personal friendships, Xtar Sports did not offer a special deal to HBB China during negotiations for the TMC sponsorship contract. However, the shadow of history was still noticed when Xtar Sports gave HBB China priority for being a founding sponsor, which granted HBB China better branding power and more marketing opportunities to exploit the event than as a premium sponsor. HBB China signed another four-year sponsorship contract in 2000 when the first three-year contract terminated. According to the new contract, HBB China would be the founding sponsor of the TMC and the title sponsor to the HBB Open for the years when the TMC was not staged. Being a non- exclusive founding sponsor to the TMC indicated a new network position for HBB China for Xtar Sports and forecast changes in the relationship in the future.
Bidding for the Masters Cup began in May, 2001 and the announcement was made in June that Shanghai defeated New York and Sydney to be the host city for the Masters Cup in 2002. According to the official document released by ATP, one of the major reasons for granting the hosting right to Shanghai was its experience in staging international tennis events in the past years, especially the success of the HBB Open.
153 This indicates the significant role of the relationship with HBB China in driving the development of Xtar Sports. History matters in that it opened up more opportunities for Xtar Sports, as the company gained valuable professional experience and established its reputation in the industry through its cooperation with HBB China. Xtar Sports was aware of this progress and considered HBB China as a distinctive partner with incomparable contributions.
The success of the bid made Xtar Sports more ambitious with regard to its future development. It wanted to work with more international clients with premium brands and to establish more cooperative ties like the one with HBB China. Xtar Sports was determined to extend its business network, which would lead to the adjustment of its perception of HBB China in later years of the relationship.
Key events discussed above are summarized in Figures 7.2 and 7.3. Figure 7.3 is based on the use of the ETHNO program with the codes of events explained in Table 6.1. Both figures illustrate and agree on the connection between these events in the learning phase. An investigation of these figures reveals an interesting finding. In Figure 7.2, four blue-colored shapes are identified representing XtarSports-focused key events, including sending a delegation to the Tennis Masters Cup in Germany, introducing a women’s tennis event to Shanghai, beginning its organizational restructuring and bidding for the Tennis Masters Cup. These events represent Xtar Sports’ efforts to prepare for its future development. On the contrary, there is no such event taking place regarding HBB China. The two red shapes both concern the activities of HBB China within the focal relationship, indicating its focus and concentration on the relationship. The observation of this contrast can be explained by the different perceptions of the relationship held by Xtar Sports and HBB China. As a well-established company with rich experience in sports sponsorship, HBB China perceives its involvement in the ATP tennis event as normal marketing efforts rather than a needed growing experience for its further development. However, as a green hand in the event management industry but with ambition for future business development, Xtar Sports perceives working with HBB China as a unique learning opportunity to grow and develop itself. It is more anxious to learn and experience, hence, being more motivated to do more.
154 The two figures further reveal that three of the four key events discussed above are connected to an early event of Xtar Sports becoming long-term oriented for relationship development as well as its own business development. This shows the adjusted goal of Xtar Sports and its impact on the firm’s actions that drive the relationship dynamics, which, in turn, affects the internal evolutionary process within the firm. It thus illuminates the continual interaction between relationship evolution and the evolution in the individual partner firm. As firms grow together with the business relationship they are in, they may see differently and can do different things. This leads to changes in terms of what and how much firms want and are able to do for its partners, which impacts the scope of the relationship. The fact that HBB China remained to be focused on the event sponsorship program while Xtar Sports started to do more to prepare for future business development could be a sign of a potential mismatch between the partner firms as they grow differently over time. As a result, the mutual fit of objectives that brought them together might be disappearing, replaced by other interests.
In summary, as the relationship unfolded over time, Xtar Sports and HBB China underwent an intensive but pleasant learning experience working with each other. This set the ground for both firms’ desire to continue the relation. Changes in Xtar Sports’ perceptions of HBB China and its goals for the relationship drove changes in the nature and content of the interaction between the two partner firms. Resource ties developed, shaped mostly by the sponsorship contract but beginning to extend to non-sponsorship contexts. Closer activity links were formed, focused mainly on the sponsorship program but starting to extend to social and non-sponsorship settings. More intimate actor bonds were built with personal relationships much deepened between managers from the partner firms. Mutual understanding was further developed as the relationship unfolded leading to more integrated schema couplings. Changes in the interaction structure signal the transition from a purely sponsorship relation to a more sophisticated business partnership. However, the transition was not complete given that the majority of the resource ties and activity links were still focused on the contracted sponsorship program.
155 Figure 7.2 Critical events in the learning phase (mid1998-2001) HBB event Actor-focused event activity-focused event resource-focused event schema-focused event Xtar Sports event X-H Interactive event sequential connection effective connection Events with other parties External environment HBB drinks H. beer sales sales soared began to drop SH Tennis market developed
SH bid for WorldExpo
HTC set up Internal SH gov. H. coop.w/h BJ promised support firm on music Environment. to the tennis event Closer rela. btwn Xtar and SH gov.
Lueno and Xtar began org. Steward were restructuring hired
6agencies PR Closer personal Xtar help w/h H hired agent More social act. rela. failed drinks sales Interaction in Relationship H sponsor WTA H be TMC 1st HO H renewed X-H work X-H. Partnership founding succeed contract closely initially forged sponsor
1+2 contract Xtar intro. WTA signed Xtar aim long-term HBB as priority to development Xtar SH dele. to TMC Xtar bid for TMC
156 Initial building phase 2002 Figure 7.3 ETHNO event sequence chart for XtarSports-HBB learning phase (mid 1998-2001)
157 Table 7.1 ETHNO codes of key events for the learning phase in Figure 7.3
ETHNO codes Explanation of event SHgovPromSupt Shanghai Municiple Government promised to render any support needed to stage the tennis event successfully MKCHjoinXX Mr. Lueno and Mr. Steward were recommended to the Eagle Group by President of Asian Tennis Association and joined Xtar Sports as experts in sports marketing 1+2contractSigned HBB signed a 1+2 contract with Xtar Sports XputHprio Xtar Sports put HBB China as its priority and tried to satisfy its needs by all means 6agcyHired 6 professional foreign agencies were hired for different aspects of event management as requested by HBB China 1stHOSuced The 1st HBB Open tennis event in Shanghai was successful HsalesSoar HBB products sales soared in the Chinese market HrenewContrt HBB China renewed the contract for another 2 years ShtenMktDev The tennis market in Shanghai began to develop well with the sports being much more popular in the city X/ShgovClser Xtar Sports had a closer relationship with the local government XaimLterm Xtar Sports aimed long-term development of the relationship with HBB China AgtFail The PR agent hired for the HBB Open failed in its performance. MorSInt More social interactions took place between Xtar Sports and HBB China ClserPRel Personal relationships between managers from Xtar Sports and HBB China developed closer XintroWTA Xtar Sports staged women's tennis event in Shanghai HspnrWTA HBB China became the beverage sponsor to the first WTA SHdeleTMC Xtar Sports sent a delegation to Germany to visit the Tennis Masters Cup (TMC) XorgRestrct Xtar Sports began to restructure it organization for more efficient and effective operation H/BJcoop HBB China was cooperating with another firm to manage its annual music event in Beijing X/HcoopCls Xtar Sports and HBB China worked closely on tennis HsalesDrop HBB China suffered dropping sales in China XhelpHsale Xtar Sports helped HBB with its dropping sales by asking the Eagle Group to purchase HBB products for its employees as New Year's gift X/Hptnership The relationship between Xtar Sports and HBB China was steered from a simple buyer-seller relationship to partnership SHExpo Shanghai Municiple Government decided to bid for World Expo in 2010 XbidTMC Xtar Sports was asked by the local government to bid for the Tennis Masters Cup (TMC) to support its bidding for the World Expo HspnsTMC HBB China agreed to stay in the relationship and became a founding sponsor to the TMC
158 7.5 Trust development during the learning phase For Xtar Sports, the learning phase is characterized by exploitation of the possibilities within the relation with activities focused on the refinement of competencies and paradigms in the relation. As the relationship unfolded, Xtar Sports had more hands-on experience about cooperating with HBB China. The enhanced and extended interactions between the two partner firms provided a fruitful environment for the development of trust (Huemer 2004a). The wishful thinking of the initial stage of the relationship is confirmed and a solid ground for trust is fostered, which later led to the exploration of new opportunities in the relationship.
The first year of actual working experience confirmed Xtar Sports’ trust in HBB China’s capability with regard to event marketing as well as its benevolence towards its partner. HBB China effectively steered the marketing strategy for the event by creating the image of the event and helped Xtar Sports to work out the detailed operational plan guided by the marketing strategy. Despite the power imbalance in the relationship, HBB China did not take unfair advantage (Bromiley and Cummings 1993) of Xtar Sports’ vulnerable role. Instead, it gave Xtar Sports valuable feedback about what it did and offered advice to enhance the marketing efficiency. As the title sponsor, HBB China committed itself to a large-scale promotion campaign that turned out to promote the event brand as well. Its behavior was consistent to the words promised during the negotiations. As articulated in earlier research on trust, consistency between words and actions increase trust (McGregor 1967; Ouchi 1981). In particular, the non-use of strong means of influence and coercive power by HBB China helped to cultivate goodwill trust in Xtar Sports. This is because, as research shows, the use of strong means can result in the influencer devaluing the worth of the target (Kipnis 1976). In addition, Hunt and Nevin (1974) argue that the use of coercive power results in a begrudging yielding of control which can damage the way the target perceives the influencer. The first year of cooperation becomes a moment of truth when uncertain trust is tested in reality and confirmed to stimulate further development in the relationship.
HBB China’s trustworthy behavior of not exploiting its power in the relationship to screw its partner firm but acting more responsibly could involve calculative motivation instead of purely goodwill. HBB China needed a major tennis event in Shanghai to promote its brand and Xtar Sports was the only company that could stage the ATP
159 tennis event. Xtar Sports’ exclusive rights to stage the ATP tennis event, coupled with its strong connection to the local government, were the chief interest of HBB China. Therefore, it made business sense to HBB China to help to improve the capability of Xtar Sports to better use its resources to make the event happen. In light of this, HBB China’s trust on Xtar Sports’ competence and goodwill was in part forced by the external environment where the relationship existed. The fact that HBB China had no alternatives motivated it to help Xtar Sports with its learning and be more committed to the relationship to make it work. This suggests the lack of a clear dividing line between calculative and affective motives behind a partner firms’ behaviors in a business relationship and shows the effects of Xtar Sports’ power on reducing the risk of opportunistic behaviors in the relationship.
Joe Spain, former Marketing Director of HBB China, “In lesser developed countries, you become much more intense with the partner that you choose, because there is no choice. If we would say no, we wouldn’t go with Xtar Sports doing the tennis, then we wouldn’t have the event. It’s very simple. There was no alternative. They were the only one who could stage this, who were willing to do this, who would set up their mission to do this…In a more mature market, if one doesn’t fit or one doesn’t work out, I will go to another one. It’s never easy to change partners, it never it, but it’s possible. But then, no, at the early time (with Xtar Sports), you don’t have a choice. You don’t have a choice at all. Then if it doesn’t work out, you would stop.”
Alan White, former Managing Director, HBB China, “Xtar Sports was the owner of the HBB Open. So when you look at your marketing plan, (you would ask) do you want to be linked to tennis or not. So that’s the first question you always ask. Do we get the exposure through the tennis? Yes or no, in line with the HBB positioning by what we want to achieve. If the answer is yes, then you go and talk with some partners. If the answer is no, then you stop your sponsorship and do something else.”
A noteworthy event in the first year was that the final game was rained off and had to be postponed to another day. HBB China displayed its understanding of
160 the unexpected situation and was cooperative when Xtar Sports dealt with the emergency. Another situation occurred in 2001 when the superstar player Andre Agassi was surprisingly eliminated in the second round. Once again, though disappointed, HBB China understood the unpredictable nature of sports and acted cooperatively afterwards. Such reaction from HBB China was highly appreciated by Xtar Sports and taken as another indication of its rich experience in sports sponsorship and goodwill in the relationship.
Cleve Steward, Managing Director, International Division, Xtar Sports, “Yes (we appreciated that HBB China understood what happened)…They (HBB China) have done enough sponsorship and they know that when you do sports or if you sponsor formula one, your car may crash on the first turn…Every sport has a level of natural risk and (when) a sophisticated company sponsors (the sports event), they may never be happy about it that their sponsored car crashes on the first turn but they understand that it is a dynamic of the sport. So that’s what is important about companies like that.”
When HBB China renewed the contract for two more years in the end of 1998, it remained practical in terms of its relational objectives, while Xtar Sports adjusted its goals to longer-term orientations. The interaction between the firms in sponsorship- specific contexts became closer and more frequent. A more specific change at this phase is the intensified information exchange between Xtar Sports and HBB China. Instead of a simple exchange of transactional information on contractual details, more operational and strategic information was exchanged. Xtar Sports consulted and collaborated with HBB China to improve the quality of the event by inviting more star players, conducting more grass roots marketing and improving the infrastructure, such as security and transportation. Xtar Sports informed HBB China about its own corporate strategy and business plans for future development. The exchange of operational and strategic information, especially the sharing of sensitive information such as the business development plan, provided more opportunities for developing trust between the partner firms (Denize and Young 2007a; Ryan 2006).
161 The confidence of HBB China in Xtar Sports was not inborn but learned out of years of cooperation, when Xtar Sports fully delivered its promises and the HBB Open produced positive results. Though the first HBB Open failed to reach the breakeven point, it generated valuable outcomes to HBB China. The sales of HBB beverage soared by 30% during the event promotion period in 1998, along with boosted awareness and preference for the HBB brand. As the outcomes the event produced were important and highly valued by HBB China, it helped to increase the interdependence between partner firms and hence, balancing the power structure in the relationship (Gundlach and Cadotte 1994).
The success in the business relationship led to HBB managers’ interest in developing personal relationships especially with Mark and Cleve, whom they respected and liked. This implies that the personal trust could not be based upon social relations alone but rather, it requires the personal experience of the partner’s satisfactory performance in business (Ford 1980a). During this phase, socialization between Xtar Sports and HBB China was an important type of activity where more familiarity was established between them and close personal relationships developed. The social interactions allowed those involved, especially the European managers from HBB China and the American team in Xtar Sports, to discover more similarities in their personalities which in turn enhanced affective trust. However, the professionalism of HBB China indicated the restricted impact of such personal relations on the business side. As explained by Alan White, former Managing Director of HBB China, “Personal relationship is always nice and helps you in certain times, but the underlying motto always is ‘does it make business sense for both parties?’” Thus, the driving force behind HBB China’s interest in and full commitment to the relationship with Xtar Sports stemmed from the business value of the tennis event as a branding opportunity as well as the fact that fewer alternative resources were available in developing countries such as China. The annoying experience of working with Seeds Event Management Corp. in Beijing on the music event confirmed the tricks and risks involved in collaborating with Chinese companies. In light of this, despite the personal liking for Xtar Sports managers, the dominant trust that HBB China placed on Xtar Sports remained to be of a calculative nature, based on the value of Xtar Sports’ resource.
162 Robert Smith, former Managing Director, HBB China, “I think that the fact that they were finally delivering what they were promising gave us so much confidence and of course, if you are in a relationship, in principle, we would have problems and issues, but they were never overriding it. It was always something that could be solved and it was always something like ‘OK, let’s take it and let’s find some solution.’ So it was a very positive attitude in the side of Xtar Sports …That makes you extremely comfortable. Because of that, you further grow into that relationship.”
The pattern of trust development so far is in line with the observation of other researchers that trust develops while communication increases (e.g., Selnes 1998). However, a more thorough examination of events in this case shows that trust also has feedback effects; easing and improving communication. It is a two way relationship between trust and communication as illustrated in the following.
The enhanced trust encouraged Xtar Sports to initiate frank communication with HBB China and ask for its help in relation to sponsoring the women’s tennis event. Though women in China have never been a target market for HBB brand, HBB China still agreed to be a beverage sponsor to the event, as suggested by Xtar Sports. This is a critical event in the history of the relationship as it triggered an initial transition in the nature of the relationship from a simple contract-driven buyer-seller relation to more sophisticated partnership. But the event also had remarkable impact on the evolution of trust. Xtar Sports’ belief in its partner went beyond believing that HBB China would not be opportunistic in the relationship to believing that it was truly concerned about Xtar Sports interests and the interests of the whole relationship (Barber 1983). This enhanced belief in the reliability of HBB China led to the reinforced trust Xtar Sports placed in it. The appreciation of Xtar Sports for HBB China’s sponsorship investment in the WTA event was evidenced by its frequent mention by managers from Xtar Sports in interviews. For example,
Mark Lueno, Executive Director, International Division, Xtar Sports, “They (HBB China) have helped us on several occasions. The most notable was in 2000 when we asked them to sponsor the WTA
163 event…which would be in the same week as the men’s. Women’s tennis has never been a high priority with the HBB brand, but because of our relationship they agreed to increase funds to tournament.”
Another noteworthy event with an impact on trust development occurred in 2000. Xtar Sports was asked by HBB China to mount a larger-scale promotion for the event, yet it was restricted by the limited marketing budget available for that year. Knowing this situation, HBB China offered Xtar Sports all the rest of its own marketing budget for the year to facilitate the improvement of the event marketing campaign. This event clearly demonstrated the commitment of HBB China to working with Xtar Sports and resulted in Xtar Sports’ increased trust in the benevolence and goodwill of its partner. It also reinforced Xtar Sports’ perception of how much HBB China trusted them.
Alex Lee, General Manager, Xtar Sports, “Of course (we appreciated it). This made us feel like we are a family. They (HBB China) would not distance themselves from difficulties and observe how we deal with the situation before making the decision of what to do themselves…For me, this is exactly what I am very happy to see.”
These important events impacted on how trust developed in this phase. Both of them occurred in an unexpected way, i.e. when Xtar Sports were in trouble and needed help. These challenges to the relationship served to both prove the relationship’s existence to those involved and develop it. This observation is consistent with the argument of Mishra (1996) that the partner firm’s collaboration in crisis is expected to have subsequent influences on trust. A crisis provides a chance to demonstrate trust in difficult circumstances that may be otherwise hard to do. The daily communication provides opportunities for trust development but the recognition of a partner firm’s trustworthiness and trust in them may arise not through routine experiences but through the partner firm’s behavior in exceptional and infrequently occurring circumstances.
In summary, during this phase, economic, structural and emotional bonds were formed simultaneously in the relationship, as well as a greater alignment of ideas and understanding, i.e. schemas. More intensive and extended interaction took place between Xtar Sports and HBB China which constituted the milieu for trust development.
164 The actual working experience enabled both firms to evaluate the quality of each other. With more interaction taking place in social settings, familiarity between the managers grew rapidly, which enhanced the trusting environment in the relationship. The experience in business and social contexts confirmed the wishful thinking of the partner at the initial phase of the relationship and generated the process of building real trust. It can be generally concluded that trust in each other has increased and been strengthened, driven by the acceptance and satisfaction of the partner firm’s competency and goodwill as evidenced especially in unexpected situations in the relationship. However, more specifically, compared to the initial building phase when capability-based calculative trust was more influential, the learning phase reflected an increased effect of benevolence-based affective trust when the relationship between Xtar Sports and HBB China grew closer. The close personal relationship between the two management teams has been critically important in opening up dialogues especially at difficult times, which helped to drive the XtarSports-HBB relationship from a sponsorship program to a more partnership-like relation. Though interorganizational trust has been reported by some researchers to be more important than interpersonal trust in relational exchanges, the latter has a reinforcing effect on the former (Zaheer, Lofstrom and George 2002) and has its impact on shaping the organizing logic (schemas) for a partnership (McEvily, Perrone and Zaheer 2003).
However, despite the impact of the elevated trust on actions and interactions in the relationship, it is not appropriate to conclude that trust has played as constructive a role in driving relationship development as it did at the initial phase of the relationship. Rather, during the learning phase, the development of trust is driven by relationship development. Trust developed in business and social settings has escalated the partner firms’ desire for a long-term relationship and changed the perception of the relationship to be more meaningful than simply a sponsorship program. But these changes did not bring concrete changes in the nature of the relationship, as most activities and interactions still took place in the sponsorship-specific context. Calculative trust became intertwined with the affective trust, which would enable both Xtar Sports and HBB China to take a step toward something unknown in the future (Huemer 2004a). This could be the moment when trust plays a key role in the development of the relationship to a real partnership. Table 7.2 summarizes the key environmental and interactive features as well as the dynamics of trust during the learning phase in the relationship.
165 Table 7.2 Major features of learning phase in XtarSports-HBB relationship (mid 1998-2001)
External Internal Relational objectives Content of Interaction Dynamics of trust environment environment Trust development Role of trust HBB China: HBB China: HBB China: Majority of interaction occurring in --Initial trust being --Trust development Growing beverage --Setting up a new To exploit the event sponsorship-specific context, confirmed as a result of being driven by the market with subsidiary in sponsorship coupled with increasing interaction learning in reality; relationship increasing Shanghai to be in investment for brand in social and non-contractual --Calculative trust being development; competitiveness charge of import and promotion in China contexts enhanced by acceptance --Calculative trust sales of HBB --Medium level of resource ties and satisfaction of the intertwining with products in China --High level of activity links partner firms’ affective trust that --Medium level of actor bonds performance in the together merge gradually --High level of schema couplings relationship; into expectations of Xtar Sports: Xtar Sports: Xtar Sports: --Affective trust being continuity and further Rapidly growing --Initiating --To secure HBB enhanced especially in enhancement of the tennis market in organizational China in a long-term social interactions and relationship Shanghai restructuring for more relationship unexpected situations in efficient and effective --To seek the relationship; operation opportunities for --Closer relationship further relationship with the local development government --Expanding business network with more clients of sponsorship
166 7.6 Discussion on propositions Propositions 4 and 5 state that as a business relationship develops, a firm’s resources and beliefs in itself and its partner firm change due to learning, adapting and interacting taking place, which, in turn, change the nature and extent of trust between partner firms. The analysis of the learning phase in the XtarSports-HBB relationship shows that the interactions between the partner firms are intensified and extended gradually. Firms grow together with the relationship development with their existing resources adjusted and new resources developed. Continuous learning occurs, out of which both Xtar Sports and HBB China become more familiar with each other, professionally and personally. Adjusted resources and beliefs are observed in partner firms. For example, HBB China gains access to Shanghai Municipal Government through its relationship with Xtar Sports, while Xtar Sports becomes more capable and professional in event management after cooperating with HBB China. Changes in the structure and content of resources trigger partner firms’ reevaluation of each other in terms of the value and contribution in the relationship that leads to adjusted beliefs especially in the capability of the other. As Xtar Sports strengthened its relationship with the local government, it was able to persuade the government to invest generously to rejuvenate Xianxia Stadium where the HPP Open was staged. This convinced HBB China of its partner firm’s capability of improving the tennis event, hence, enhancing the calculative trust placed on Xtar Sports.
At the same time, beliefs change when partner firms feel each other out during the cooperation, such as their commitment, goodwill and integrity. HBB China’s non-use of its coercive power in the first year of the relationship and Xtar Sports’ readiness to help with HBB China’s dropping sales when requested both result in strengthened beliefs of partner firms in the other’s benevolence and commitment to the relationship, which, in consequence, elevate the existing trust between each other and it became clearer to each partner the trust the other had in them. These observations in the case provide support to propositions 4 and 5.
Proposition 6, which suggests the direct impact of adjusted intentions and goals in changes in the conditions of trust in business relationships, is not supported by the results. When HBB China renewed the contract for two more years, Xtar Sports adjusted its relational goals to be long-term oriented. The change in goals didn’t lead to
167 changes in its trust in HBB China but the new goals drove Xtar Sports to take different actions to experience more with its partner, whereby Xtar Sports was able to adjust its beliefs in HBB China that led to revised conditions of trust. This indicates the indirect impact of adjusted intentions and goals on trust, which is consistent with the argument in Chapter 6.
The identification of trusting attitudes and trusting actions as two components in the dynamics of trust in business relationships, as defined in Chapter 6, provides further explanation for the insufficient support for proposition 6. Firms are guided by their adjusted intentions and goals to take actions in the relationship as responses to a given environment, which manifest or not their existing trust in the other. This reveals that a firm’s adjusted goals have direct impact on building its trusting intention, which, in turn, influences the chances of the occurrence of trusting actions. HBB China’s renewal of the contract with Xtar Sports for two more years was an explicit expression of its trust in the partner firm in terms of its capability of fulfilling relational tasks. But behind this trusting action was also HBB China’s long-term interest in the Chinese market and its strategy of boosting its brand image through sports sponsorship. This provides evidence to the impact of firms’ intentions and goals as a motivating force for trusting actions.
Proposition 8 states that the nature of trust will become more complex as a business relationship develops. It further contends that cognition-based trust and emotion-based affective trust will co-exist and interact to drive the relationship development. The learning phase only covers the first few years of the XtarSports-HBB relationship, but it shows that the nature of trust has become gradually more sophisticated and comprehensive. The trust developed in the initial building phase is simple in that it is mainly of a calculative nature when both firms rely heavily on the observable value of resources to determine their confidence in each other. In the learning phase, when more interactions take place these allow Xtar Sports and HBB China to learn and experience more about each other in different settings. Trust is tested and then becomes more substantiated. When Xtar Sports and HBB China helped each other at difficult times, their belief in the benevolence and goodwill of the partner firm was reinforced, leading to the development of affective trust. Further, as individuals in Xtar Sports and HBB China had more social interactions, emotions of liking and attachment were further cultivated, setting another ground on which affective trust was built. These observations
168 lend support to the argument in terms of the increasing complexity of trust with co- existence of calculative and affective trust. In addition, the senior managers in HBB China became more interested in developing personal relationships with their counterparts in Xtar Sports, when they were satisfied with the business performance of Xtar Sports in the relationship. As a result, more social interaction took place, out of which personal affects were bred. This shows how calculative trust could feed into the development of affective trust. It further supports Proposition 8 which suggests the interaction between different types of trust.
7.7 Discussion of mechanisms underlying dynamics of trust 7.7.1 Mechanisms related to trusting attitudes As a business relationship unfolds, a trusting/distrusting environment is being formed. Trust develops as a cumulative product of repeated interactions between the partner firms through which they come to understand each other and to evolve a common understanding (Chou and Zolkiewski 2009). The new environment in the relationship in the learning phase in terms of the scope and content of interactions indicates that a different set of mechanisms may operate to drive changes in partner firms’ trusting attitude towards the other than occur in the initial building phase.
The first mechanism to be noticed is an exchange mechanism which happens through the processes of interacting and includes service exchange, information exchange, financial exchange and social exchange (IMP Group 1997). It is through interacting that the resources of partner firms are integrated and activated, and firms adjust their goals and objectives to achieve mutuality (Ford, Hakansson and Johanson 1986). Interacting is performed by individuals and subgroups within partner firms, who have intentions when interacting and make interpretations of the interaction and the intentions of others (Giddens 1975), which, in turn, lead to another round of interacting with adjusted intentions and different interpretations. Therefore, interacting proceeds with interpersonal and intertemporal inconsistency (Ford, Hakansson and Johanson 1986). This indicates that as a result of and during interacting, other types of mechanisms can be triggered to affect the perception and behaviors of people and firms in interactions. Since focal firms remain connected in the relationship through interacting in various ways, the exchange mechanism permeates all phases of the relationship but may trigger
169 different other mechanisms and produce different outputs given particular spatiotemporal contexts of operation in the relationship.
The ongoing interactions in the learning phase of the XtarSports-HBB relationship provide the firms with opportunities to acquire firsthand knowledge of their partners, such as capability and competitiveness, compatibility of corporate cultures, as well as the existence or any lack of friendliness and benevolence. The acquired knowledge enables the firms to confirm or not their pre-experiential hopes of their partners, which strengthen or weaken the initial trust constructed at the inception of the relationship. This implies an operation of experiential learning mechanisms activated by exchange mechanisms. Though detected in the initial building phase, experiential learning mechanisms function more saliently when the relationship unfolds with intensified interactions. It refers to the process of how firms update their beliefs of their partners through hands-on learning in the relationship, which leads to changes in trusting attitudes. This is a cognitive mechanism by which firms adjust and update their cognitions and views of themselves and their partners. Learning about the trustworthiness of partner firms is a continuous process as firms interact with each other over time (Lewicki and Bunker 1995; Mayer, Davis and Schoorman 1995; Shapiro, Sheppard and Cheraskin 1992), therefore, experiential learning mechanisms function throughout the relationship evolution.
Learning about the trustworthiness of partner firms takes place in diversified contexts including contract-specific and extra-contractual contexts. Firms learn different things about each other, based on the observation and assessment of actions and motives in these settings. In the learning phase, the fact that Xtar Sports has spared no efforts to improve the tennis event rapidly convinced HBB China of its professionalism and capability, while its help with the sales of HBB products made HBB China believe in Xtar Sports’ care and concern towards the partner. Similar situations existed for Xtar Sports when HBB China provided professional advice to Xtar Sports on event marketing and contributed extra resources when Xtar Sports was short of budget to improve the marketing campaign. This type of proactive involvement in activities by Xtar Sports produces feedback effects and additional learning that would not happen otherwise.
170 This analysis illustrates that firm’s behavior in different contexts have differential impacts on developing trust. A firm’s in-role behavior provides the strongest evidence of its capability of completing tasks as defined in the contract. Therefore, the learning of such behaviors is related to beliefs in the firm’s competence and professional qualifications, which ultimately leads to the enhancement of reduction of calculative trust by the partner firm. On the other hand, as a firm does not have any obligation in terms of its behavior in an extra-contractual context, its extra-role performance is usually seen by the partner as a true confession of the firm’s commitment to the relationship and goodwill to the partner firm. Therefore, the learning of a firm’s behavior beyond the contractual context is most likely to strengthen or weaken its partner firm’s beliefs in benevolence and integrity, which ultimately leads to the enhancement or reduction of affective trust by the partner firm. These findings show the moderating effects of the context of interactions on how experiential learning mechanisms operate in a business relationship.
Experiential learning affects trust development through an adapting mechanism. This is a process whereby firms make adjustment to their resources, beliefs and behaviors based on what they have learned in the relationship. Firms might develop new resources such as building up a reputation in the industry and refine existing resources such as improved marketing skills. This is what Xtar Sports achieved after years of collaboration with HBB China on the tennis event. The revised resources of Xtar Sports enabled it to improve the quality of the event and contribute more to the relationship. This led to adjusted beliefs of HBB China in the capability and competency of Xtar Sports, which subsequently promoted the development of trust in it. This shows that the outcome of learning in the relationship produces adaptation in partner firms’ cognitions and behaviors that triggers changes in other cognitions in processes of sensemaking and dissonance reduction. These become integrated and balanced in the mind in part in terms of trusting attitudes. In light of this, the adapting mechanism is both a cognitive and behavioral mechanism that operates to impact the building of trusting attitudes and perceptions between partner firms.
A firm’s resources and beliefs in its partner are not only affected by the ongoing experiential learning from behaviors and actions taken by the partner firm but also by the evaluation of the outcomes of actions and interactions (Narayandas and Rangan
171 2004). The result of such evaluating processes leads to certain level of satisfaction a firm has with its partner and the relationship. Eagly and Chaiken (1993) note that evaluating refers to all classes of evaluative responding, whether overt or covert, cognitive, affective or behavioral. This definition indicates the extensive impact of evaluation on a firm’s cognitive and affective beliefs in the partner firm that ultimately drives changes in trust. In the initial phase, formative evaluating mechanism is identified whereby the partner firms rely on historical learning to form initial impression of each other at the inception of a relationship. The analysis of the learning phase of the XtarSports-HBB relationship identified the operation of comparative evaluating mechanisms, triggered by experiential learning mechanisms within the focal relations and in other relations. This is consistent with the literature that a firm’s satisfaction with the partner firm and the relationship results from an evaluation of outcomes compared to expectations of the focal relationship (Bennun 1986; Davis and
Marquis 2005) and performances of other relationships or Clalt (Anderson and Narus 1984; Kelley and Thibaut 1978).
The expectation-based comparative evaluating mechanism describes the evaluating process by which behaviors and outcomes are compared to expectations, the result of which leads to adaptation of firms’ cognitive and affective beliefs in partners, thus, impacting the development of trusting attitudes and perceptions. The operation of this mechanism can be seen in the consistency between HBB China’s words and actions in the early years of cooperation which is convincing to Xtar Sports in terms of the partner firm’s expected competency and integrity, thus confirming its initial trust in HBB China as a capable and reliable partner. Xtar Sports’ success in having Shanghai Municipal Government invest in rejuvenating the stadium for the HBB Open met or even exceeded the expectations of HBB China in terms of the quality and value of the government relationship with Xtar Sports, which subsequently strengthened HBB China’s belief in the trustworthiness of Xtar Sports.
Expectation is important in trust creation and development in that the desire of cooperating firms to maintain cognitive consistency (Lord and Maher 1993) between actual and expected values, behaviors and outcomes affects how they interpret the performance of the partner and the relationship (Adobor 2005). Expectations could be formed based on real-time experience or past experience with current or other business
172 partners (Bennun 1986). They range from cognition-based expectations regarding desirable qualities of an efficient business relationship, such as achieving business objectives and solving problems effectively, to value-based expectations involving cultural compatibility and good faith (Davis and Marquis 2005). This implies that an expectation-based evaluating mechanism is of a cognitive nature. The perceived fit between expectation and actual performance determines how satisfied focal firms are, which reaffirms or shakes their belief in the value of each other that, in turn, influences the building or diminishing of existing calculative and affective trust. The identification of expectation-based evaluating mechanism supports the early argument of the dynamic interplay of outcomes and trust by Boyle and Bonacich (1970) and Mayor, Davis and Schoorman (1995).
While expectations influence a firm’s perceived satisfaction with the partner firm and the relationship that ultimately drives trust development, changes in trust also generate feedback effects shaping expectations. This is another example of the functioning of the adapting mechanism. The analysis of the learning phase of the XtarSports-HBB relationship unveils a change in HBB China in terms of its expectation of Xtar Sports, as the nature and value of the relationship became clearer to HBB China resulting in more precise expectations. This change is based on the substantial experience of successful and productive cooperation, which confirmed and increased the initial trust placed in Xtar Sports. This gave HBB China more confidence in what Xtar Sports could contribute and what the relationship could achieve, affecting its goals and expectations.
Expectations reflect the trust between partner firms. For example, firms with low expectations would tend to have lower level of trust in their partners as they think that high expectations are not likely to be met (Adobor 2005). Greater trust could not sit easily in the mind with such expectations; it would produce cognitive dissonance leading to some kind of adaptation to each other as well as to other relevant cognitions such as beliefs about the other (Festinger 1957). On the other hand, expectations affect how trust could develop. Reasonable expectations could be constructive to trust building in business relationships. Adobor (2005) argues that there could be some optimal level of expectations to be adopted by firms in business relationships. Too low an expectation would make the expecting firm feel less of a need to actively engage in interacting with and building confidence in its partner, while too high an expectation
173 would increase the difficulties of meeting them, leading to the expecting firm’s dissatisfaction and loss of confidence in the partner. Both of these situations show how unreasonable expectations could be counterproductive to trust development in business relationships.
A firm’s satisfaction with and expectation regarding cooperation are also determined by comparisons with the experiences and achievements in other relationships. The level of the satisfaction could complement, reaffirm or destroy the existing beliefs the firm holds about its partner in terms of its competency, benevolence and integrity, which in turn promotes or hampers the further growth of trust. This is shown in the learning phase of the XtarSports-HBB relationship when HBB China appreciated more the candidness and transparency in the relationship with Xtar Sports after cooperating with Seeds on the music event. The unpleasant working experience with Seeds subsequently produced carryover effects in the focal relationship where HBB China increased its overall satisfaction with the efficiency and effectiveness of the cooperation with Xtar Sports and enhanced its belief in the trustworthiness of the partner. Here the evaluation of HBB China are influenced by the behavior in and outcomes of another relationship which were compared with those in the focal and other relations that firms have developed. This generates adapted cognitive and affective beliefs in partner firms that lead to revisions in the nature and degree of trust placed on those firms.
An important trend emerging in the learning phase of the XtarSports-HBB relationship is the increasing number of social interactions, which lead to closer personal ties and emotional bonding being built up between the management teams in the partner firms. HBB managers’ interest in developing personal relationships was born out of its impression of the success of the business cooperation with Xtar Sports. This indicates the functioning of a kind of interaction effect between calculative and affective trust, or what could be called a transferring mechanism, which concerns the spillover effects of calculative trust on the building of affective trust at the interpersonal level. The transferring mechanism is a social mechanism that involves processes whereby a firm’s well-established confidence in the capability of its partner firm helps to foster the firm’s interest in the individuals in the partner firm, thus, expanding the scope of interactions to social settings, where social learning takes place that impacts the development of affective trust. Out of social interactions, firms acquire knowledge of each other as
174 people, as individual personalities with values. Though managers in Xtar Sports saw their counterparts in HBB China as tough and stubborn in doing business, they realized they were approachable and had fun-seeking personalities when they had drinks and played tennis. This resulted in interpersonal attraction and liking for each other, which supported the development of affective trust. Also, when out together, Mark Lueno and Cleve Steward were always keen to observe if HBB products were placed appropriately in bars and if the brand was marketed hard enough, which was taken by HBB China managers as a sign that these Americans cared about and were committed to the HBB business. Such cognitions reinforce affective trust attitudes because they are congruent cognitions. Transferring mechanisms operate in conjunction with and interact with experiential learning mechanisms to drive changes in the level of trust between partner firms.
In summary, the learning phase of the XtarSports relationship witnesses a shift of focal firms’ attention from a transaction-oriented approach to a business relational-oriented approach (Sheth and Sharma 1997). This shift creates a fertile soil on which initial trust could change in its nature and strength. Trust development processes depend on the incremental accumulation of evidence and the interpretation and adaptation of behaviors and outcomes that confirm or disconfirm, strengthen or weaken the initial beliefs of partner firms. Four new mechanisms have been identified to explain changes in the nature and extent of trusting attitudes, namely, experiential learning mechanisms, adapting mechanisms, comparative evaluating mechanisms, and transferring mechanisms. These mechanisms are interconnected and could be triggered by each other, operating simultaneously or at different times, to produce changes in trust.
7.7.2 Mechanisms related to trusting actions Trust development is a history-dependent process (Child 2001; Larson 1992) in which trust accumulates or diminishes incrementally. The process of trust being used is different in that it is a strategic response to particular external, internal and relational environments and is more context-dependent. Though a higher level of trust may increase the likelihood of trusting firms acting trustingly, firms will take more than trust into account when making strategic decisions to take trusting actions.
175 The main trusting actions occurring in the learning phase of the XtarSports-HBB relationship are HBB China’s renewal of the sponsorship contract in 1998 and its decision to continue the relationship when the HBB Open was replaced by the Tennis Masters Cup in 2001. Both actions reflect the well established and substantiated trust HBB China placed in Xtar Sports, especially in terms of its capability of fulfilling relational tasks and their benevolence, being concerned with the partner’s interest and benefits. The investigation of the context in which these actions took place unveils additional mechanisms.
During the interviews, the senior managers of HBB China explicitly pointed out that the key factor for them to consider before deciding whether or not to continue the relationship was if the relationship could do any good for the HBB brand. The strategic importance of Shanghai, coupled with the overall marketing objective of uplifting the brand image and promoting the sales, were important motivating forces behind HBB China’s decision to renew the contract. These actions, therefore, are selected by HBB China to attain its corporate goals. An evaluating mechanism is at work, whereby HBB China compared its marketing goals to the potential relational benefits. The compatibility concluded out of the evaluation promoted HBB China’s behavioral readiness, positively affecting HBB China’s intention of taking the trusting action of continuing the relationship.
HBB China’s decision to continue the relationship is based in part on its prior experiences with the relationship. The perception of the relationship as pleasant and successful gave HBB China more confidence in achieving its relational goals, thus, enhancing its intention to stay in the relationship. This indicates the working of a self- efficacy mechanism by which firms are more prone to do what they have done before, especially those that they have perceived as successful. Self-efficacy refers to “beliefs in one’s capabilities to organize and execute the courses of action required to produce given attainments” (Bandura 1997, p3). According to Bandura (1997), the most influential source through which self-efficacy beliefs can be developed is the interpreted result of one’s prior performance, or mastery experience that serve as strong and direct indicators of capability. Outcomes interpreted as successful raise self-efficacy; those interpreted as failures lower it (Bandura 1997; Lindsley, Brass and Thomas 1995). Self- efficacy beliefs have been found to influence behaviors in various ways (Pajares 1997).
176 It influences the choices people make and the courses of actions they take as most people are more likely to perform a task in which they feel competent and confident and avoid those in which they do not. This reveals the impact of efficacy on behavioral intention. In the context of this discussion, self-efficacy can be understood as a key cognitive mechanism that connects partner firms’ perception of past performance of the relationship to their intentions to continue it. It is a kind of biased evaluation towards repeating what was done successfully in the past.
The compatibility between corporate goals and relational benefits, as well as the successful history of cooperation, are two major reasons that HBB China decided to renew the contract and stay in the relationship, even when Xtar Sports terminated the operation of the HBB Open. But there is a third reason, as revealed in the analysis of the learning phase, which is the personal affection and emotional bonds that HBB managers developed with their counterparts in Xtar Sports. This led to their desire to stay connected with Xtar Sports. A social bonding mechanism is thus unearthed. This mechanism is based on emotions, in particular, the personal affect developed between individuals in partner firms. While stereotyping mechanisms are grounded on personal attraction bred out of geographic and cultural proximity, social bonding mechanisms are based on more concrete personal affection developed on a broader basis as a result of individuals’ hands-on experiences with each other in the relationship. Therefore, social bonding mechanisms are more likely to occur when personal relationships are established in a business relationship.
In a series of studies, Frijda (1987) has shown that emotions can be described in terms of both situational appraisals and modes of action readiness. Bagozzi, Gurhan-Canli and Priester (2002) define emotion as a mental state of readiness that is often expressed physically and may result in specific actions to affirm the emotion. Positive emotion, such as personal affect, is always accompanied by expanded attention, increased optimism and a shift from self- to an other-centered orientation (Bagozzi, Gurhan-Canli and Priester 2002). This indicates the role of personal attraction and their emotions in driving the balancing processes in an individuals’ cognitive system to manage responses to events and environments, and produces characteristic action tendencies. Social bonding mechanisms are emotion-based mechanisms that operate through the process whereby the existence of personal affect motivates individuals to display their trust in
177 others and makes them inclined to cooperate with others (Williams 2001). This builds up individuals’ behavioral readiness, which leads to intentions to conduct trusting actions when necessary and possible. While the evaluating mechanism is based more on firms’ economic calculation to determine whether or not to act on trust, the existence of emotion-based social bonding mechanism complements the basis on which firms make judgments. Emotions have to be consonant with cognitions. This agrees with Lehrer’s (2009) argument that human minds do not rely on rational thoughts only to make decisions but there is a blend of emotion and reason. Emotions arise from deeper cognitive processes in the brain, which we may not be conscious of but which represent digested and integrated histories of experiences and perceptions and neurological mechanisms that we experience as emotions and feelings.
In summary, the learning phase of the XtarSports-HBB relationship presents a different milieu where business exchanges develop along with the emergence of a social fabric in the working relationship. The changing context in the relationship implies the existence of a different mix of mechanisms operating to impact firms’ intention to take trusting actions, as compared to the initial building phase. The evaluating mechanism, which operates in the initial phase, is identified again in the learning phase. In addition, a self- efficacy mechanism and social bonding mechanism are identified as affecting the focal firms’ behavioral readiness to act trustingly, which, in this context, refers to the decision of continuing the relationship.
178 Chapter 8 Case Analysis of XtarSports-HBB Relationship ---Transitioning phase (2002-2004)
8.1 Overview The transitioning phase of the XtarSports-HBB relationship covers the period from 2002 to 2004. It involves experimentation with new alternatives and uncertain returns for both partner firms. The elevated trust that Xtar Sports and HBB China place on each other plays a critical role in driving the evolution of the relationship during this phase, as the trust builds up the desire for relationship enhancement and continuity (Andaleeb, Lee and Gruneisen 1992; Anderson and Weitz 1989; Selnes 1998). From the year 2002, Xtar Sports and HBB China cooperated on holding the Tennis Masters Cup and various new projects in the music industry. Resource ties, activity links, actor bonds and schema couplings are at their most developed level in the relationship history, but the extent and structure of trust does not change much over time. A stable level of trust is established in the relationship in which the patterns of actions and interactions occurring reproduce the governance and relational structure that in turn reinforces the trust between the two firms.
Figure 8.1, which is Phase III in Figure 6.1, illustrates the general pattern of the relationship development during the transitioning phase. It shows two clear lines of major events occurring in this phase, one concerning events related to the interaction between the focal firms in extra-contractual contexts, the other describing events occurring that involved Xtar Sports concerning changes in its personnel structures, resources and schemas. The pattern indicates two parallel processes of relationship development and the self-development of Xtar Sports. While the relationship is transitioning into a more comprehensive and closer partnership, Xtar Sports is experiencing an internal evolution as well, driven by its ambition for future business development. The processes are connected through a common event related to the internal environment of Xtar Sports. This indicates the interaction between the internal evolution of the focal firm and the relationship evolution, which will be explained in detail in the following analysis.
179 Figure 8.1 Summary chart for XtarSports-HBB transitioning phase (2002-2004)
ReE/Ppr
OC/RES2 ExE/BMkt(-)
FFI FFA/X/ExR FFA/H/ExR InE/H/Strat ExE/TMkt(+) HCP2/Strat FFA/X/ExR InE/X/Ppl FFA/X XCP2/Ppl FFA/H/ExR InE/X/R
FFI/ExR_ FFS/X ReE/Pwr
FFA/X/ExR
XCP3I InE/H/Org
InE/X/Org OC/RES3
Environmental factors Process: InE: internal environment I: interaction ExE: external environment A: activity ReE: relational environment R: resource Strat: strategy S: schema TMkt: tennis market ExR: extra role BMkt: beer market Soc: social Org: organizational structure Biz: business Ppl: personnel structure Outcome: Ppr: personal relationship OC: outcome Pwr: power structure Perf: performance Actor: RES: relationship evolutionary status H: HBB Links and symbols: X: Xtar Sports Sequential link TP: third party Transformative link XCP: party connected to Xtar Sports + positive/more HCP: party connected to HBB - negative/less FF: focal firm
180 8.2 External environment The tennis market in Shanghai during this period progressed with the tennis population increasing at an average of 21.2% per annum (Research Center of Event Statistics 2006). However, the unexpected breakout of SARS in China in 2003 and the launch of the Formula One races in 2004, which took place just two days before the HBB Open, affected the popularity of the tennis event in those years.
While the tennis population in Shanghai was burgeoning, so was it in other cities in China. The number of tennis fans in China was over 4 million by 2004 whose average annual expenditure on tennis ranged between AUD$300 and AUD$850 (Research Center of Event Statistics 2006). 16 teams had registered for the Chinese Tennis League by 2004, compared to only 8 teams in 1999. In September, 2004, another high-ranked ATP tennis event, the China Open was staged in Beijing, which presented another opportunity to companies interested in sports sponsorship.
The intensified media coverage of international top-tier tennis events, the improvement of tennis facilities and the successful operation of international tennis events such as the HBB Open, the Tennis Masters Cup and the China Open were among the major reasons for the increasing popularity of tennis in China. But the burgeoning market was further encouraged when Ms. Ting Li and her partner Ms. Tiantian Sun won the tennis doubles gold medal in the Olympic Games in Greece in 2004, the first major tennis event that the Chinese had ever won.
The Tennis Masters Cup in 2002 was a successful event that fulfilled the financial, operational and political goals for various parties including Xtar Sports, the ATP and the Shanghai Municipal Government. Despite the soaring cost of approximately 13 million US dollars for staging the event, Xtar Sports achieved breakeven in the end, largely due to the success with sponsorship sales. Almost 150 foreign journalists arrived in Shanghai to report the Tennis Masters Cup. Meanwhile, the event was broadcast live in 146 countries in Europe, South America and the Asia-Pacific region. Over 71 million people around the world watched the event, which set a new record of media coverage in recent years for the Tennis Masters Cup. As mentioned by ATP in years later, the huge success of the event in 2002 was a very important reason for Shanghai winning the bidding again in 2004.
181 It was no doubt that the Shanghai government was thrilled by the triumph of the event. The wide media coverage around the world had boosted the brand awareness of Shanghai as the hosting city and displayed the city’s impressive capability for organizing large-scale international events. A month after the Tennis Masters Cup, it was announced in Monte Carlo, Monaco, that Shanghai was selected as the hosting city for the World Expo in 2010.
Regarding the beverage market in China, in 2002, it surpassed the U.S to become the world’s biggest market by volume and accounted for 16.9% of world-wide beer consumption. The low per capita consumption in China created formidable opportunities for growth. By 2004, annual beer sales in China reached $6 billion and was growing at 6% per year, compared with the flat growth of 1% to 2% in developed markets such as Europe and the U.S. In light of this, the fast-growing Chinese market had become a more important battlefield to win, especially for international corporations such as HBB.
8.3 Internal environment Though the overall market was burgeoning in China, the sales of HBB products in the nation began to drop in 2001 and the decline continued until 2004. Its main problem was in southern China, where most bars and pubs sold exclusive brands only and HBB China failed to get the contract with those outlets. The deteriorating market performance later led to a change of the strategic map of HBB in China - it shifted its marketing focus from eastern China to southern China. The declining sales also affected the structure of the marketing budget in HBB China. In the following years, HBB China decreased the budget for sports sponsorship projects and began to seek new marketing opportunities such as in the music industry.
Derick Beek, former Marketing Director, HBB China, “Of course if something changes in the business environment, i.e. HBB basically hit tough times in China, one of the first things to be cut was its expensive tennis events…certainly it would be cut back in a few steps at first to
182 limit a little bit of the exposure…and of course that changes the nature of the relationship.”
Despite the overall decline of HBB sales in China, its sales in Shanghai have always been increasing steadily and held up HBB’s brand. Taken as the key market in China, Shanghai replaced Hongkong to be the headquarters of HBB China in 2003. This strategic shift triggered two changes. Firstly, the move bridged the distance between the partner firms, hence, enhancing convenience and efficiency in communication. Xtar Sports started to communicate directly with the President of HBB China and have more exposure and contact with the senior management in HBB China. The removal of the geographic distance offered Xtar Sports better opportunities to develop closer personal relationships with HBB senior management. Secondly, until 2002, the majority of the marketing that HBB China did was above-the-line so that it relied solely on the media benefits gained from the tennis sponsorship. As HBB China did not have a well- equipped marketing force on its own to do more integrated marketing, the tennis event in Shanghai was the most important chance for its promotion and branding in China. But from 2003 on, HBB China increased its marketing budget and did more below-the- line advertising on its own. An in-house marketing team was set up in Shanghai for HBB China to take up more marketing responsibilities. HBB China began to seek more marketing opportunities to boost its sales in addition to the event sponsorship. As a consequence the role of Xtar Sports as the chief marketing operation for HBB China was weakened. Though the changes in HBB China may have adjusted the power structure in the relationship, more significantly, they ushered in more opportunities for Xtar Sports and HBB China to expand cooperation into new areas.
In January, 2004, in light of the potential growth and market consolidation trends in China, Asia Beverage Ltd. (ABL) streamlined all its operations under HBB Asia Pacific (China) Pte Ltd. (HAPLC), which was a 50-50 joint venture by ABL and its shareholders, Fraser and Neave Limited and HBB. HAPLC assumed all production, marketing and sales of beverage brands under ABL and HBB as well as other strategic activities including investments, mergers and acquisition in China. By then, HAPLC had operations such as Shanghai ABL (SABL), which was in charge of producing HBB-branded products since 2004, as well as a sales and distribution arm of HBB Trading (Shanghai) Co. Ltd., which marketed HBB brand and products in China.
183 Though the intention of these strategic changes was to integrate operational and marketing efforts of HBB in China, the reality was different. Since 2004, HBB China has not been involved in any big events except the tennis event, due to instability caused by internal organizational and personnel changes. The organizational change impacted the budget structure of HBB in China which led to a reduced budget for marketing. Regarding personnel change, since HAPLC would take the whole responsibility of the operation in China, most key decision-makers would be local people instead of the European team as it used to be. This indicated that the close personal relationship that Xtar Sports had developed with the senior management personnel in HBB China would be of less use to the relationship as they had less influence over the new HAPLC management team. However, the negative effect was mitigated by the fact that Alan White, former Managing Director of HBB China, was appointed as the Chairman of HAPLC. Alan had been a close friend to the senior management in Xtar Sports, especially Mark and Cleve, since the early years of the HBB Open. His transfer to the most powerful position in HAPLC was a potential advantage for Xtar Sports. Given that this major internal organizational change in HBB China took place at the end of the transitioning phase, its impact on the relationship development was not obvious until later.
The major change in the internal environment of Xtar Sports at this phase was the redesign of its organizational structure. Alex Lee, the General Manager of Xtar Sports used a vivid metaphor in an interview to explain the expansion of the company as a natural movement to meet the demand from its growing business.
Alex Lee, General Manager, Xtar Sports, “Actually when there were six to eight people (when the company was first established), it was like a mixture, with some division of responsibilities. It was like a bowl of don with rice mixed with dishes, a bit of everything but tasting good. The table was small and we could only place one bowl on it and we wanted both dishes and rice. So this was a good solution. But when the table was bigger, you couldn’t just place one bowl on it. It was really a shame, and furthermore, it was not enough to feed so many people. So at this time, you need to separate dishes and rice.”
184 The event in 2000 whereby the hired PR firm failed to submit the working plan by the deadline relaxed HBB China’s insistence on using professional PR firms for event promotions. This gave Xtar Sports an opportunity to do PR on its own to save cost. Since then, Xtar Sports had been restructuring its organization and recruiting talented staff. To prepare for the upcoming Tennis Masters Cup in November, 2002, a formal division of functional departments was complete in early 2002. New personnel were recruited especially for the PR department. In that year, Xtar Sports did PR planning on its own but a local PR firm was hired for execution, which offered a valuable learning and training experience for the newly-recruited PR staff in Xtar Sports. The team took over to do PR on its own from the HBB Open in 2003.
Xtar Sports bid for the Tennis Masters Cup again in 2004 and won the hosting right for three years beginning in 2005. This was a golden opportunity for Xtar Sports to develop itself but a daunting challenge as well in that the company had to sell more sponsorship and would have more clients to service in the years to follow. To meet these demands, Xtar Sports further improved its organizational structure and launched another large- scale recruitment at the end of 2004. The department of client services was taken out of the department of sales and more professional staff were recruited for the new division. Xtar Sports staff became more seasoned during the course of operating the Tennis Masters Cup. As commented by Mr. Lesley Wong, Chairman of the Eagle Group, “The most down-to-earth contribution that the Tennis Masters Cup has made to us is to help us foster a well-trained professional team of sports marketing and event management.”
While the set-up of functional departments enabled Xtar Sports to provide more professional services, this also freed some senior management personnel from frontline client services and allowed them to be committed more to strategic issues for the further development of the company.
Alex Lee, General Manager, Xtar Sports, “In the first several years, much client service was done by Mark and me. We ourselves were doing client services, so we were in both the frontline and the backside…Now we’ve got a more professional team for client services with one person taking care of two or three clients…The efficiency and professionalism
185 have been improved. So now I still drink with our clients, but I don’t need to work in the frontline of client services.”
Coupled with the organizational restructuring in Xtar Sports, its personnel structure experienced noticeable changes as well. The most significant one was the promotion of Alex Lee to be the General Manager of the company in 2003. Alex used to be an executive assistant to Mr. Lesley Wong, Chairman of the Eagle Group, and had close personal relationship with Mr. Wong. When Xtar Sports was established in 1997, Alex was assigned to the new company as the executive assistant to the then General Manager. Since then, he had always been a key member in Xtar Sports and was deeply involved in initiating and managing the relationship with HBB China. Alex’s close ties with Mr. Wong and other government officials facilitated the communication between Xtar Sports and the government, which helped Xtar Sports to gain more support from the government especially at difficult times. This bonding was always taken as an advantage until Alex climbed to the top of the power pyramid in Xtar Sports. As it turned out, his tight connection with the government ushered in not only support but pressure as well, when more domestic clients were recommended by the local government as sponsors and special deals were requested at times. The attempt to please the government with the allocation of benefits in favor of domestic sponsors caused internal conflicts in later years between Alex, who was in charge of domestic clients, and the foreign team in Xtar Sports that was responsible for the international clients including HBB China. This will be further described in the next phase when the internal conflict started to affect its relationship with HBB China.
8.4 Process of interaction in the relationship The understanding and bonding between Xtar Sports and HBB China cultivated over the years of cooperation began to work at this phase to drive the interaction in the relationship. The multi-level communication between Xtar Sports and HBB China was deepened when HBB invited senior managers in Xtar Sports again to visit its Headquarters in Europe in 2002 and Xtar Sports managers worked closely with all departments in HBB China, as well as its creative and media agencies. Xtar Sports continued to improve the tennis event not only for the audience but also for its sponsors. It began to organize more sub-events during the course of the major tennis event, such
186 as a golf event for all sponsors and a hospitality event for the media. From time to time Xtar Sports would ask HBB China for a favor to supply beverages for these events and the partner was always supportive by contributing extra resources. In return, Xtar Sports would deliver extra benefits to HBB China whenever possible such as more media exposure and better banner positions. Out of these interactions grew a tighter and deeper connection between the two firms. The relationship became institutionalized in that routines and sentiments were developed that gave the partner firms a feeling of belonging together (Hakansson and Sharma 1996).
Along with the maturity of the relationship, Xtar Sports started to expand its horizons based on its experience, learning and resources derived from years of working with HBB China. The relationship had helped Xtar Sports to see more, think more and do more, which led to its own network development with new partners pitched and new links formed. At this phase, the primary motive for Xtar Sports was to sustain the relationship with HBB China, not necessarily in sports sponsorship only. After achieving big success with the tennis and being convinced that HBB China was committed to a long-term relationship, Xtar Sports was ready to seek and take opportunities to cooperate with HBB China on more projects. This is in line with the observation by Anderson and her colleagues (Anderson, Havila, Andersen et al. 1998) that partner firms act on a basis of their recurrent interpretations of their positions and roles in the relationship, which evolve through the experience gathered in the interactions. Learning in this aspect leads to changes in partner firms’ expectations of the relationship. Given this, naturally and smoothly the relationship between Xtar Sports and HBB China gradually transformed from a pure buyer-seller sponsorship relationship to a strategic partnership in which the context of cooperation was diversified.
Cleve Steward, Managing Director, International Division, Xtar Sports, “We knew they (HBB China) were going to be there, so the question was ‘are there other things that we should be doing together, because the partnership is good’”.
Once there is confidence developed by focal firms in a business relationship, the relationship acquires its own legitimacy and value, hence, an independent right to
187 survive (Hakansson and Sharma 1996). The relationship then becomes a resource with its own momentum. As revealed in the case, continuing the relationship provided a base for the partner firm to identify new opportunities for the relationship, which helped to ensure its survival.
In 2002, the Tennis Masters Cup landed in Shanghai for the first time. Compared to the HBB Open whose prize money was USD400,000 in 2001, the TMC was a much more prestigious and larger-scale ATP event with prize money of USD3.7million in total and more star players competing for the championship. As the operator of the event, Xtar Sports had successfully signed up more businesses from home and abroad to be sponsors at various levels. HBB China was the founding sponsor but no longer the preeminent one. Mercedes-Benz, a global automobile company, invested heavily to be the top-tier principal sponsor and other brands including Pepsi, Lacoste, China Mobile and JP Morgan Chase signed on to be premium sponsors. The expanded network of relations of Xtar Sports affected the network position of HBB China. Xtar Sports did not treat HBB China as the only priority any more, rather, it had more to consider to manage its clients in a balanced way. In light of this, there was a shift to a more intentionally-managed network of clients for Xtar Sports.
Peter Yan, Deputy General Manager, Xtar Sports, “During the years of HBB Open, we all felt that HBB China was our priority. We had to consider first how it would feel before taking any actions. This was our unwritten principle in Xtar Sports acknowledged by everyone. But this feeling was not quite obvious while we staged the Tennis Masters Cup.”
Despite the change of HBB China’s position in the business map of Xtar Sports, history still matters and leaves its ink in the form of emotional bonding between the two partners. A noteworthy trend during this phase is that more interactions took place in private and social settings, especially between the foreign team in Xtar Sports and the European senior management in HBB. Given the importance of the event sponsorship to the marketing of the HBB brand, all top management personnel in HBB China were involved in working with Xtar Sports, so they were quite approachable, which made the personal relationship between the two teams more easily brewed. Xtar Sports managers would travel to Amsterdam with the HBB team to meet their brand staff in different
188 parts of the world. Managers from both firms would play golf together and go out to Discos and Karaoke bars. At such times Mark and Cleve would always keep a keen eye on the marketing of HBB products and inform HBB managers once anything wrong was noticed.
As argued by Ford (1980a), the commitment of a company to a business relationship could be seen by the way it organizes its contacts with the partner firm, including the status of personnel involved and the frequency of contact. Therefore, the intensified social exchange between Xtar Sports and HBB China in this phase was an important indicator of the mutual commitment. It provided a fruitful arena to strengthen the emotional ties and to foster feelings of belonging between the partner firms. Such outcomes of social interaction made it more difficult to disentangle the effects of inter- organizational ties that reflect economic and transactional efficiency from those that reflect personal relationships embedded in the same social networks (Cunningham and Turnbull 1983; Easton and Araujo 1994; Von Hippel 1988). Consequently, the economic exchange in the relationship could not be completely divorced from non- economic exchanges such as social interaction and friendship networks. The dense fabric of social exchange, coupled with the deepened personal relations, produced out of such interactions, enhanced the connection in resources, actors, activities and schemas between the partner firms, which ultimately helped to maintain the legitimacy of the relationship and sustain its existence. The following events provide insights into the embeddedness of economic activities in social networks.
Alan White, who was the Managing Director of HBB China at that time, was a very close friend to Mark Lueno in Xtar Sports. They even lived in the same residential complex. In early 2002, they attended a party together, where Alan introduced Mark to his friend, a senior manager in Nutricia, another European company operating in China. In the conversation, Alan mentioned the pleasant experience of HBB China being a sponsor to the tennis event in Shanghai. The small talk later initiated a serious business discussion between Xtar Sports and Nutricia on sponsorship and finally resulted in a formal contract that Nutricia became a sponsor to the Tennis Masters Cup in 2002.
Since 2002, Mark would be approached by HBB managers for his opinions and advice on certain investment proposals that HBB would consider, most of which were related
189 to sponsorship. The communication on this was very informal, mostly via emails or even over drinks. As remembered by Mark, “we might be having a beverage somewhere and it will be the marketing director (of HBB China) who will say ‘you know what, what do you think of this act?’”. By being a shadow consultant to HBB, Mark was indirectly involved in the decision-making process in HBB regarding what events were appropriate and worthwhile to sponsor.
The close and tight personal relationship between Xtar Sports and HBB China smoothed the communication that the two teams could get right down to business instead of chasing each other with phone calls to organize a formal meeting. More significantly, a trend of organizational citizenship behavior (Organ 1988) is noticeable in these events, in that people from both firms were voluntarily engaged in benign behaviors beneficial to the other’s organization. These behaviors were more motivated by the affectionate attitude between each other as they may not be directly rewarded by the formal system. Such behaviors were more frequent in the later years when Xtar Sports and HBB China began to cooperate in music business.
Mark Lueno, Executive Director, International Division, Xtar Sports, “Certainly if we were in the market place or if they were in the market place and we have an event or they have something that they are excited about, the first place we would go is to one another’s office and say “hey, look at this opportunity” or “would you guys consider promoting this or sponsor this?” That relationship certainly exists in that type of friendship. It’s always there.”
Alan White, former Managing Director, HBB China, “If you are in a very difficult discussion on contracts or you have a very difficult issue at hand, then it’s easy if you know the person on the outside to call them up and say ‘listen, can we meet tomorrow for a beverage and can we look at how we can solve this?’ That’s what I mean that like a certain time I need some help and they can do it.”
More suggestive in these events is the interplay among actors, activities, resources and schemas in the relationship. The range and type of activities that the partner firms could
190 pursue were restricted by resources but evolved when Xtar Sports had developed its resources and more schema congruence was discovered and reinforced out of interactions in the past years. When new types of activities were linked, more thorough resource ties could be achieved with mutual access to resources of the other firm realized. Activity links were affected by ideas, perceptions and attitudes, i.e. schemas, but in the process, new ideas, perceptions and attitudes might be produced and connect themselves with existing ones, which would work together to affect future activity links, resource ties and actor bonds.
Over the years of operating the HBB Open, Xtar Sports has gained new resources such as event management expertise and media relationships, while improving existing resources including better and more extensive government relationships. The company has developed its core competence in event marketing and positioned itself as a professional event management firm. The development of a rich resource reservoir in Xtar Sports allowed it to do more for HBB China, thus contributing more in the relationship. But a more thorough change it triggered is in the power structure with Xtar Sports gaining more power in the relationship. This in turn affects each partner’s disposition towards the other, including communication and behavior (Gundlach and Cadotte 1994). When HBB China and Xtar Sports were more interdependent, they became more communicative so that they could come to the other with challenges and ask for help directly. The balanced power structure facilitated the close interaction and mutual learning process in the relationship.
Since 2001, HBB China had been in trouble with its sales in Guangzhou, southern China. Plagued by the constant declines in sales, HBB China decided to do heavier marketing in southern China and asked Xtar Sports for help with the challenge. Xtar Sports then used its media resources to do additional marketing for HBB China in Guangzhou during the Tennis Masters Cup in 2002, including bus advertising and outlet promotions.
As revealed in interviews with Xtar Sports staff, Xtar Sports’ willingness to help on this occasion was chiefly motivated by the business value of HBB China, that it was a big enough client worth keeping. Therefore, its assistance with the additional marketing for HBB China was more of a business decision rather than a favor out of emotional
191 attachment. However, the fact that Xtar Sports had the ability to help with its partner’s marketing objectives gave both firms more confidence that Xtar Sports could do more for HBB China in the relationship. This helped to set the ground for the relationship to be transformed to a real partnership.
Cleve Steward, Managing Director, International Division, Xtar Sports, “Absolutely (that people from HBB China were happy with what we did extra for them during the event)…I think we have shown them that we can help them not just (providing a tennis event), I mean tennis is just a vehicle to do what they are trying to do.”
Alan White, former Managing Director, HBB China, “That was part of our strategy that we wanted to expand the reach of the Shanghai (HBB) Open at that point of time into other areas not only Greater Shanghai. Here again it’s working with partnerships…that’s the strong part of the professional partnership that we have.”
Xtar Sports had a strong desire to extend cooperation with HBB China and Mark and Cleve had frequently expressed this to their HBB counterparts in informal occasions. But there had never been any formal discussion of the issue, as both parties were not fully ready for the expansion. Xtar Sports was short-staffed and HBB China did not have sufficient marketing budget for more events. However, a tipping point came to light in late 2002. Given the worsening market performance in China, HBB China was asked by its Headquarters in Europe to stage more events for marketing purposes, thus, it decided to add music as a new direction in its marketing strategy. It communicated with Xtar Sports on its plans to sponsor music events and asked if Xtar Sports would be interested in being an event promoter for those events. Xtar Sports agreed but on a contingent base. It would not get engaged in a new project if its existing resources were insufficient. The thoughtful answer from Xtar Sports implied that the company was not ready to take the risk for any failure in cooperating with HBB China that might affect the existing relationship. Besides, it disclosed Xtar Sports’ awareness of protecting its reputation in the event management industry for future development.
192 Alex Lee, General Manager, Xtar Sports, “We never lost our confidence in organizing and promoting music events. However, we were not a professional company in this area, so we would be very careful with the selection of projects. We don’t wish to have any example of failures…Many events have commonalities, so we hope that we can make use of our professional expertise when exploring into the music industry.”
The event of initiating the formal discussion on extended cooperation reflected HBB China’s willingness and readiness to depend more on Xtar Sports to help with its own marketing objectives. It was an encouraging sign of its satisfaction with and trust in cooperating with Xtar Sports after it delivered on all its promises and spared no efforts to improve the quality of the tennis event. A higher level of interdependence was achieved between Xtar Sports and HBB China along with deepened interaction, which led to a more sophisticated partnership in the following year.
The milestone year in the history of XtarSports-HBB relationship is 2003. It was in this year that the two firms formally extended the scope of their collaboration from sports sponsorship to a variety of projects. In addition to collaborating on the HBB Open in September, Xtar Sports was asked to organize the Annual Convention of HBB Distributors in China and manage a series of functioning events for HBB China. But the two major cooperative events in this year were DJ Tiesto’s concert in Chengdu and the Rolling Stones concert in Shanghai.
In 2003, the HBB Headquarters in Europe launched an around-the-world music tour for its branding campaign starring DJ Tiesto, one of the most famous DJs in the world at that time. When the event came to China, HBB China needed a local partner as the event organizer. The difficult relationship with the company in Beijing that HBB China used for HBB Beat in the late 1990s made them an inappropriate choice. It was then a logical decision for HBB China to partner with Xtar Sports, given the excellent track record of cooperation on the tennis event and the willingness of Xtar Sports to expand the cooperation into new areas. In addition to that, HBB China needed Xtar Sports’ close government ties to solve the problem of obtaining the permit in time for the concert. Behind the apparent comfort and confidence in Xtar Sports fostered in the past
193 was also a testing eye from the managers in HBB China. They were using the music event to assess the capabilities of Xtar Sports to manage events other than tennis.
Joe Spain, former Markteing Director, HBB China, “It was also testing the water, testing how it would work. We would see if Xtar Sports could really do that sort of thing. It was very different from the big tennis ATP event. They had already had their key knowledge. They’ve been in the sports world, the tennis world for a long time.”
The DJ Tiesto concert was the very first music project that Xtar Sports had conducted. Moreover, the fact that the event would take place in other cities than Shanghai posed more challenges to Xtar Sports in terms of the event management. Xtar Sports regarded its involvement in the project as a favor to HBB China when it needed help. But this was not the only motive behind the decision, as remembered by Alex Lee, the General Manager of Xtar Sports, and Zoe Zang, former Client Service Director of Xtar Sports. Their thoughts demonstrate Xtar Sports’ equality in the relationship with HBB China and its growing independence as a professional event management firm.
Alex Lee, General Manager, Xtar Sports, “I know that HBB China is a straightforward company that respects fair business…so if it invites you to do something, they will never make you lose anything. Your efforts would definitely be paid off. So for us, there were three benefits (that we could get out of the DJ Tiesto project). Firstly, to service our client. Secondly, to make money. Thirdly, to develop a new business…This was a win-win situation to both parties, a very good deal.”
Zoe Zang, former Client Service Director, Xtar Sports, “We looked at the budget plan for the DJ Tiesto concert from HBB China and knew that we would make some money out of this project, but not much. However, we were still willing to do it, because it could help us to train our staff.”
194 The event of HBB China approaching Xtar Sports with its challenge of bringing DJ Tiesto to China has another significant meaning to Xtar Sports. It gave the firm a strong feeling of being trusted by its partner. It convinced Xtar Sports of its capability to help HBB China with its problems within and beyond the sponsorship context.
Cleve Steward, Managing Director, International Division, Xtar Sports, “The event (of DJ Tiesto’s concert) only strengthened our relationship with HBB China---that we could resolve and help them with their marketing projects in China and that we were ‘on their team’.”
Zoe Zang, former Client Service Director, Xtar Sports, “HBB China approached us for the music events in 2003. This was based on their trust on us. HBB China trusted our whole team very much because we could deliver every benefit included in the contract, or if we couldn’t, we would replace it with other extra benefits.”
The perception of being trusted by HBB China was encouraging to Xtar Sports, which led to reciprocal use of Xtar Sports’ trust in HBB China. The DJ Tiesto concert required getting people “on the ground” in Chengdu; it was not easy for Xtar Sports to handle the project when it was not in Shanghai. More importantly, few people in Xtar Sports had experience in the music industry. Xtar Sports finally agreed to take over the event for HBB. This decision was in line with Xtar Sports’ ambition of extending its business. It was also a trusting behavior driven by Xtar Sports’ confidence in HBB China’s choice of project and their goodwill towards Xtar Sports. The existence of trust prepared Xtar Sports to be ready to take the risk and uncertainty and vulnerability of an entirely new business environment.
The perception of being trusted by HBB China generated a greater sense of responsibility in Xtar Sports to the relationship and motivated it to apply its trust in the partner firm that ultimately led to its further commitment to the relationship. This is similar to the situation of HBB China at the inception of the relationship, when it was aware of the full dependence of Xtar Sports on it and responded with stronger sense of responsibility for the event and the relationship. Another’s dependence seems to beget
195 some degree of care and benevolence and any support given is highly appreciated and indirectly rewarded.
The cooperation on the DJ Tiesto’s concert turned out to be a success from which HBB China learned more about what Xtar Sports could do and what they could do together. It then became natural for HBB China to partner with Xtar Sports again on another music event, the Rolling Stones concert in 2003. The concert was big news to the whole world because the Rolling Stones had been trying to perform in China for 30 years but all in vain for various reasons. Therefore, it would be of great business value to be associated with the premium brand of the band. However, when an international agency approached HBB China with the proposal, it rejected it because Xtar Sports was not involved. Later, when Xtar Sports had an opportunity to stage the concert and approached HBB China with the proposal of title sponsorship, HBB China agreed immediately.
The process of applying for the permit from the Central Government in China for the Rolling Stones concert was complicated and time-consuming. Before the permit was issued, there was much uncertainty about whether the concert could be finally staged or not. HBB China, as the title sponsor, was under great stress, as it could not activate its sponsorship with marketing and promotional activities. The only thing it could do was wait. However, HBB China showed great understanding throughout the process and handled the stress well, largely due to its rich experience as an active sponsor in the sports and music industry around the world.
Cleve Steward, Managing Director, International Division, Xtar Sports, “The event was on and off for probably three or four times. Most sponsors wouldn’t be able to handle that kind of stress, because it was ‘do we go into the market and promote it, or do we wait’ and all this. But they (HBB China) were very patient with the whole situation because they had been here and they knew that these things could get cancelled.”
The permit was not issued until 8 weeks before the concert. Despite the rush caused by the late release, both HBB China and Xtar Sports were excited that the event finally had
196 a go. However, Xtar Sports was not completely released from concerns. Cleve and Mark were among the very few people in Xtar Sports who had been engaged in the music business before. Their experience allowed them to be more aware of possible risks in running a music concert. The Rolling Stones was one of the best-known bands in the world and it was their first time to China. Many things could go wrong in the process that might force them to cancel the trip. In February 2003, SARS broke out in China. Though the situation in Shanghai was under control at that time, it remained a threat that could cause the cancellation of the concert anytime. Therefore, as suggested by Cleve, Xtar Sports purchased a huge insurance policy for HBB China and itself that covered the investment of both parties on the concert. The SARS situation in Shanghai worsened in March and as a result, the concert had to be cancelled at the last minute as decided by the agency of the Rolling Stones. It was no doubt that HBB China was disappointed and frustrated in the first place, however, they accepted the decision with understanding.
Xtar Sports responded to the decision of cancellation immediately by working out a detailed follow-up plan. All sold tickets were fully refunded and the brand of HBB as the title sponsor to the concert was not affected even slightly. Moreover, thanks to the major insurance package, HBB China did not suffer much financial loss, either. They had all their sponsorship fee and up to 75% activation fees back, which was unprecedented in their history of sponsorship.
The practice of purchasing a major insurance policy was normal in the music business for event promoters, but it was not usual for an event promoter to insure sponsors. Interestingly, managers from Xtar Sports and HBB China interpreted Xtar Sports purchasing a much bigger insurance policy than normal to protect the interests of HBB China as sharply different. From the perspective of Xtar Sports, it was a manifestation of its thoughtful consideration of HBB China, especially in a risky business environment. Xtar Sports did this because of the close relationship with its partner. It did HBB China a big favor in this event, as HBB China had done for Xtar Sports before.
Cleve Steward, Managing Director, International Division, Xtar Sports, “No, they (HBB China) didn’t ask for it. I went to them and said ‘listen,
197 this is what I’m going to do’. This is because of our relationship. It was out of both personal relationship and normal business sense.”
However, the managers in HBB China did not consider such an effort as an extra thing that Xtar Sports did for them but instead, they perceived it as necessary in any professional partnership.
Alan White, former Managing Director, HBB China, “On the Rolling Stones part, it was clear that at a certain time there was a big risk on the Rolling Stones, given at that point of time there was SARS and some other things in China happening. So we both agreed that we needed insurance for that one. It was a partnership.”
This event has had other effects on relationship development. It was the first and most frustrating setback in terms of event management for both Xtar Sports and HBB China. However, as they worked together to weather the storm, the relationship became more secure and dependable.
In September, 2003, Xtar Sports staged the HBB Open again during which HBB China resumed its priority position. In this year, Xtar Sports took a chance to impress HBB China with a pleasant surprise. Xtar Sports happened to get in touch with the agent of a European player, who shined in the French Open in early 2003. Without revealing the news to HBB China, Xtar Sports paid USD50,000 on its own to get the player to the HBB Open and announced his participation in the press conference in June. The managers from HBB China were caught by surprise but took it happily and gratefully. The importance of overdelivering and delighting your customer or client has been referred to by others as a key to developing a productive relation (Bitner 1995; Narayandas and Rangan 2004).
This event was representative of Xtar Sports’ efforts to take every possible opportunity to please and satisfy its partner, which is obvious during the operation of the HBB Open, when the network of clientele for Xtar Sports was small. As the years passed by, Xtar Sports acquired more memories of working with HBB China on various projects, which changed its perceptions and feelings towards HBB China. The value of HBB China to
198 Xtar Sports has transcended any simple calculation of the dollar value the firm has invested in the sponsorship. HBB China meant a lot more to Xtar Sports, being its first coach in sports marketing and event management, a reference company that helped to develop more new clients and a family member who had cared for and supported Xtar Sports throughout the relationship. These functions of relations have been referred to as indirect or network functions in the literature (Walter, Muller, Helfert et al. 2003; Young, Wiley and Wilkinson 2009). The wide and deep connection with HBB China made it a unique and irreplaceable partner to Xtar Sports. Given this, the stimulus of Xtar Sports to please and satisfy HBB China became less rational and calculative but more natural. An event occurring in 2004 provides further evidence.
Though the Rolling Stones concert was not staged in the end, Xtar Sports took the chance to develop its business network and this later opened up unexpected opportunities for new projects. In 2004, Elton John was planning to stage a concert in Shanghai. The event promoter happened to be the partner of Xtar Sports in the Rolling Stones project. Therefore, Xtar Sports was invited on board and got engaged in the Elton John project as the event organizer.
As usual, among the first things to do for Xtar Sports was to sell the title sponsorship. Dweyer, another big international brand operating in China at that time, heard about the concert and showed a significant amount of interest in being the title sponsor. However, Xtar Sports insisted that HBB China be asked first. If it refused, then Dweyer could take the title sponsorship. In the end, HBB China rejected the proposal due to the mismatch between the HBB brand and the image of Elton John. Dweyer then took over the title sponsorship.
When Xtar Sports broadened its own horizon and began to work with more clients, it discovered more value in HBB China than simply being a professional and committed partner. Throughout the years of cooperation, Xtar Sports had learned tremendously from HBB China in respect to how to promote a brand using event marketing strategy. The vision developed out of these experiences had helped Xtar Sports to pitch new clients and provide better services to other clients. For example, when Aurora and China Mobile approached Xtar Sports asking for help with their promotion during the event,
199 Xtar Sports would provide advice based on what it had learned in the case of HBB China, such as designing promotional campaigns and integrating media resources.
Zoe Zang, former Client Service Director, Xtar Sports, “HBB China did not yield huge business revenue to us, however, it offered us great help with improving our skills of event marketing…The marketing concepts and visions that we learned from them have helped Xtar Sports to satisfy other clients.”
After staging the two music events in cooperation with HBB China, Xtar Sports shifted its focus back to sports events and had been making substantial progress in developing its business. In addition to the HBB Open and the Tennis Masters Cup, Xtar Sports organized the F1 U.I.M powerboat Grand Prix in Shanghai in 2004. This was a large- scale event with international influence thanks to the brand power of F1. After winning the hosting rights for the Tennis Masters Cup for another three years starting in 2005, Xtar Sports rented the ATP franchise (the former HBB Open) to an international agency for three years, which meant that the HBB Open would no longer exist in Shanghai from 2005. This movement indicated Xtar Sports’ determination to be fully committed to the Tennis Masters Cup and its ambition of staging more prestigious events in the future. In contrast to Xtar Sports’ determined efforts, HBB China had not done much with its marketing since 2004, due to instabilities caused by organizational restructuring. It did not get involved in any big event except for the tennis events from 2004. This passiveness seemed to be an ill omen for the future relationship between Xtar Sports and HBB China.
Figures 8.2 and 8.3 present maps illustrating the sequences of and connections between the key events occurring in this phase. Figure 8.3 is the output of ETHNO program with the codes of events explained in Table 8.1. Both figures are consistent to each other in terms of the interpretation of the connections between the key events. They reveal a sharp contrast in terms of the intensity of events taking place involving Xtar Sports and HBB China in this phase. As shown in Figure 8.2, eleven events are in blue, i.e. involving Xtar Sports, while only five events are in red, i.e. involving HBB China. The figure further demonstrates that the majority of the five red events are related to the internal environment of HBB China, such as moving its Headquarters to Shanghai and
200 starting restructuring the organization, while the eleven blue events cover activities concerning the internal environment as well as business expansion, such as staging Elton John’s concert and renting the ATP franchise for the HBB Open to Vietnam. The comparison of the number and nature of the events occurring within Xtar Sports and HBB China implies that the focal firms have grown at different speeds with relationship development over time, following different directions and paths, driven by different ambitions and strategies. HBB China was focused on the relationship to enhance its efficiency as a marketing opportunity, while Xtar Sports began to realize and appreciate its own capabilities and wanted to do more when opportunities arose. This may herald the melting of the mutual interests that connect the focal firms. Though Xtar Sports and HBB China know each other well and keep treating the other favorably, they were moving apart gradually.
The above observation discloses that the relationship’s evolutionary process can become very much connected to the internal evolutionary process within a focal firm. This reflects another level of interaction in a business relationship. A relationship is a quasi organization. As it grows and develops, different parts do not grow at the same rate as it expands. This applies to any system and reflects a general principle known as the law of variable proportions in economics (Boulding 1953). In business relations, the law can be seen in the way that partner firms grow at different rates as a relationship develops. In the process, they adjust their schemas and behaviors as well as their perceptions and expectations of the relationship. This is not a Darwinian evolution but a quasi-Darwinian one (Eyuboglu and Buja 2007) in that the changes do not occur randomly but also deliberately to the benefit of partner firms. As a result, the complementary objectives that bring the two firms into the relationship at the beginning could be altered and become replaced by other interests. Such changes may result in partner firms’ efforts to identify new areas for cooperation and strategically expand the scope of the relationship; or an increasing mismatch between partners grows that leads to the downgrading of the relationship to be at an arm’s length or even termination. The embeddedness of and interactions between the processes of relationship development and the internal evolution of partner firms in a business relationship add to the complexity of the relationship making its evolutionary path more unpredictable.
201 Figure 8.2 Critical events in the transitioning phase (2002-2004) HBB event Actor-focused event activity-focused event resource-focused event schema-focused event Xtar Sports event X-H Interactive event sequential connection effective connection Events with other parties External H sales dropping in CH environment but increasing in SH
H.CH X completing Internal X won bidding headquarters org. Environment. X had more H. seeking for TMC for 3 yrs clients more mktg moved to SH restructuring ABL started opportunity restructuring its operations X won bidding for TMC 2002 Better relation Alex LEE Closer ties with H. headquarters asking with SH gov. became Xtar GM for more events SH gov.
Interaction in Adjusted network position of H Relationship 2002 TMC X rent ATP succeed franchise (former X H.Open) to Viet. H. less active balancing in event rela’s w/h marketing H.& other clients X did Elton X did extra John project mktg for H. H. & X working on DJ Tiesto
H. disc. w/h X H. intro. new client to X its music direction H. & X working X protected H’s Closer personal interest on Rolling Stones rela btwn X&H H. consulted Lueno for sponsorship projects
202 Learning phase 2005 Figure 8.3 ETHNO event sequence chart for XtarSports-HBB transitioning phase (2002-2004)
203 Table 8.1 ETHNO codes of key events for the transitioning phase in Figure 8.3
ETHNO codes Explanation of event ClserPRel Xtar Sports and HBB developed closer personal relationships HintXClt HBB China introduced new clients to Xtar Sports out of personal relationships HconsX Senior managers in HBB China would consult Mark Lueno in Xtar Sports on proposals of other sponsorship projects HsalesDrop HBB product sales was dropping in CH HCHhqtSH HBB Headquarters in China moved from Hongkong to Shanghai XwTMC Xtar Sports won the bidding for TMC for the year 2002 XgovClser Xtar Sports had a better relationship with the local government XMorClt Xtar Sports extended its network with more clients of sponsorship XbalClt Xtar Sports needed to balance the relationships with HBB China and other clients TMCSuc TMC in 2002 was successfully staged XhelpH Xtar Sports did extra marketing for HBB China during the TMC in 2002 XTMC3y Xtar Sports won another bidding for TMC for three years starting in 2005 HOrent Xtar Sports rent the ATP franchise (former HBB Open) to Vietnam XorgRes Xtar Sports completed its organizational restructuring HAdjNP HBB China's network position as perceived by Xtar Sports was adjusted HMorMktg HBB China was seeking more marketing opportunities to boost its declining sales HhqtIns HBB Headquarters were asking HBB China to stage more events for marketing purposes HdisXmus HBB China discussed with Xtar Sports on its new music direction for marketing HXDJ HBB China and Xtar Sports worked on DJ Tiesto concert HXRS HBB China and Xtar Sports worked on the Rolling Stones concert XinsurH Xtar Sports purchased a large insurance package to protect the interest of HBB China XElJohn Xtar Sports was invited to be an event organizer for the Elton John concert in Shanghai ABLrest ABL started restructuring its operations in Asia Pacific area and affected the organizational structure of HBB China
HlessAct HBB China became less active in event marketing due to internal instability XnewGM Alex Lee was promoted to be the new GM of Xtar Sports XgovClser Xtar Sports had a closer ties with the local government
204 8.5 Trust development during the transitioning phase With years of actual cooperation, Xtar Sports and HBB China had developed familarity and respect towards each other, along with a well developed trusting environment. Unlike the previous phase when a hope for the best is being transferred to solidly- grounded trust, this phase seems to be one where real trust proves to exist and is sustained and acted on. Trust becomes the basis for planning additional activities.
The extended and intensified business and personal interaction in the past years resulted in the building of broad trust (Zaheer, Lofstrom and George 2002) at this phase of the relationship. This was unlike the early years of cooperation, when the trust of HBB China in Xtar Sports was driven dominantly by the exclusive resource of the ATP event Xtar Sports possessed and Xtar Sports’ trust on HBB China largely hinged on its branding and financial power. The trust Xtar Sports and HBB China placed on each other at this stage was grounded a comprehensive basis that showcased the trust being deepened and strengthened. Xtar Sports’ competence trust in its partner continuously hinged on HBB China’s professional contribution to the tennis event with its marketing expertise. Meanwhile, the record of successful actions of Xtar Sports, including full benefits delivery, the improving experience of the tennis event and the winning of prestigious ATP awards, created the basis for the competence trust of HBB China in Xtar Sports. More noticeably, the trust of HBB China in Xtar Sports was fortified by the favorable performance of Xtar Sports in the extracontractual venue (Narayandas and Rangan 2004), where Xtar Sports provided more value to the partner firm than was expected, including conducting extra marketing for HBB China to promote its sales, successfully operating DJ Tiesto’s concert and paying for the European player for the HBB Open out of its own pocket. The solidified trust influenced and redefined the expectation of HBB on Xtar Sports, which helped to move the relationship to the next level of partnership.
In addition to the firms’ performance in the relationship, the network effects did not go unnoticed in the process of trust development at this stage. As Xtar Sports expanded its business network and started to serve more clients from home and abroad, it realized that many clients lacked knowledge and skillfulness in event marketing. They were not clear with their marketing objectives for sports sponsorship and had little idea of how to leverage their sponsorship investment with event promotions, hence, causing difficulties
205 in communication with Xtar Sports. The experiences with other partners in the network helped Xtar Sports to realize the uniqueness and reliability of HBB China that resulted in a fortified ground for competence trust. Such effects of connected relationships reiterate the importance of the network context, in which the focal firms were embedded, to adjusting the definition of the firms’ network identity to each other (Anderson, Hakansson and Johanson 1994), indicating that the consequences of a business relationship could appear far from the original event, hence, likely to be unexpected and hard to identify (Hakansson and Sharma 1996).
Along with the strengthening of competence trust, the development of goodwill trust between the partner firms was spurred as well in formal and informal occasions. HBB China contributed its cases of tennis sponsorship in the U.S. Open and the Australian Open to help with Xtar Sports’ learning, while Xtar Sports exploited its own resources to help with the dropping sales of HBB beverage in China. In 2002, Xtar Sports pitched new clients for the Tennis Masters Cup through the network of HBB China. In 2003, when Xtar Sports began to conduct the event PR on its own, HBB China generously supported Xtar Sports by offering its financial and professional resources whenever needed. In 2004, despite the opportunities of sponsoring the China Open tennis event in Beijing, HBB China did not change its sponsorship structure and chose to stay with Xtar Sports. The critical events during this period of time show that trust was being strengthened not only in day-to-day operation but in unexpected situations as well.
The problem of HBB sales in China worsened during this phase. To address the challenge in the market, HBB China asked Xtar Sports to help by doing additional marketing in southern China during the Tennis Masters Cup in 2002 and offering advice on other sponsorship programs. When cooperating on the Rolling Stones concert in 2003, Xtar Sports and HBB China were both frustrated by the sudden cancellation of the event at the last minute due to the breakout of SARS in China. However, both firms survived this testing event with professionalism and kind understanding. Dealing with the unexpected events both challenged and proved the relation, and helped to strengthen the ties between the partners. Without these challenges it is harder to judge the other, trust it in the same way and be sure of its trust in you. Therefore, challenges and risks can be seen as opportunities to build trust (Lyons and Mehta 1997). Trust ebbs and flows during the ongoing business relationship.
206 The evolution of trust could also be seen in the way trust is used in the relationship. The transitioning phase is an exploration period in the history of the relationship that involves experimentation with new alternatives with uncertain returns as each party learns to use the relation as an additional resource that enables them to do more, see more and think more. The relation itself becomes a new type of organizational actor opening up possibilities for both HBB China and Xtar Sports (Wilkinson and Young 2005b). The competence trust in Xtar Sports motivated HBB China to lead its counterpart into a new area of business in the music industry. It was more as a business decision detached from any emotional ties. However, the distinction between competence and goodwill trust was not clear in the end for Xtar Sports. The trust that Xtar Sports had developed in HBB China as both a capable and committed partner and a reliable friend over the past years translated into actions whereby Xtar Sports responded positively to HBB China’s proposal for collaborating on music events in 2002 and later it teamed up with HBB China in connection with the DJ Tiesto’s concert in Chengdu in 2003. This is a typical example of a trusting action (Anderson and Narus 1986) that Xtar Sports was willing to take risks and commit itself to a possible loss when doing business in an uncertain market. However, at the same time, Xtar Sports perceived these projects as opportunities for developing new business as well as for returning the favor to HBB China.
These events marked a new era in the history of XtarSports-HBB relationship as the scope of the cooperation was formally expanded. It could be generally concluded that the trust both firms had developed towards each other played a key role in driving relationship evolution. The existence of trust motivated the efforts to deepen the cooperation, assisted in reducing the perceived risk and stretched the firms’ acceptance of uncertainty when entering a brand new business. The contingent nature of trust behind its active roles is also apparent, which is confirmed in a closer examination of the relationship history, as explained in the following.
Derick Beek was the Marketing Director for HBB China until 1999. Though he was firmly convinced of Xtar Sports’ competence in event management after the successful operation of the HBB Open, such trust did not work actively in motivating him to even think of expanding the scope of cooperation. He perceived Xtar Sports as an expert in
207 the tennis business, a critical complimentary skill that HBB China needed in the relationship. Guided by the branding strategy of HBB China, he believed that the tennis event was the only common interest for the two firms that generated shared objectives. Therefore, it was not sensible to lead the relationship to other fields where Xtar Sports may not have complimentary skills and the shared goals between the two firms may not exist. For HBB China, Xtar Sports played a specific role in the relationship. It was not always possible and necessary to pass on the existing trust in one area to the other, which unearthed the boundary of trust placed by HBB China.
Derick Beek, former Marketing Director, HBB China, “ No, (I have never thought about developing the relationship to a more extensive degree.) Because if you look at it, they (Xtar Sports) do sports marketing and we do beverage selling. And the only common area of interest is the tennis tournament in Shanghai. For the rest of it we did not have shared objectives. We are not going to sponsor a ping-pong match or anything like that and we are not thinking about expanding our tennis events beyond one big event in Shanghai. So no, simply put, our focus was tennis in Shanghai and that is the thing where we had a shared objective and shared goal and it did not make any sense to expand the relationship to anything else.”
The situation changed when Joe Spain took over the position of Marketing Director in HBB China in 1999. She quickly built her trust in Xtar Sports out of the smooth working experience and was more open to communication about collaborating with Xtar Sports on more projects. However, her willingness to promote the relationship to a higher level was restricted by the limited resources available in the company such as an insufficient marketing budget for more events and shortage of staff especially in the marketing department. Nevertheless, the energy of trust was ready when HBB Headquarters instructed HBB China in 2002 to stage more events in China to promote its brand. It was then a natural step for HBB China to initiate a discussion with Xtar Sports on developing new cooperative projects. The adjusted strategy of HBB China, driven by the new strategy of HBB Headquarters, was accompanied by the reallocation of resources in the company and created an environment where its trust in Xtar Sports was allowed to play a more active role in the relationship development.
208 Joe Spain, former Marketing Director, HBB China, “Yes, we did talk with them and they also wanted to set up for us events. They were talking about music at that time and they were also talking about more tennis…I don’t think we could have asked for another big event in Guangzhou, for example. …I don’t think we had the money for the third huge event. There were two big events, one in Beijing, one in Shanghai, every year. And that’s what we could do maximum.”
The different ways trust has been used and the different role it played in relationship evolution, as revealed in the above discussion, provide evidence for the contingent nature of trust in business relations. Trust has its own boundary that may not be spanned easily. Though trust could be a key factor for the continuation of business relations, it does not necessarily drive relationship expansion to new areas. The processes of building and implementing trust follow different paths, affected by different sets of factors. Key individuals can play an important role and be a tipping point between different courses of action based on how they perceive the relation and partner.
Two critical events occurring in 2004 were noticed which further reveals how trust has been used in this phase. They reveal that there was a lack of conscious trust in the transitioning phase in that trust was being used less on the basis of conscious calculation of the consequences such as checking the opportunism by the partner firm.
In August, 2004, Xtar Sports organized a Formula One U.I.M Powerboat Grand Prix in Shanghai. This was an influential event because it was the first time for the event to take place in China. Besides, the competition was held on Huangpu River, a politically sensitive area in Shanghai, which was unprecedented. The event was positioned as an outdoor entertaining event targeting the mass market. Therefore, Xtar Sports felt that it might not be consistent with the premium brand image of HBB. However, it still discussed it with HBB China giving it first refusal before selling the sponsorship to another beverage company.
Peter Yan, Deputy General Manager, Xtar Sports, “As we cooperated on more projects, we hope that…because HBB China is a very good
209 client, we hope that they could participate in more of our projects and events.”
A similar event took place in September, 2004, when Xtar Sports staged the Elton John concert in Shanghai. Despite the enormous interest expressed by Dweyer, another global beverage brand in China, to be the title sponsor to the concert, Xtar Sports insisted that they should bring the proposal to HBB China first to see if they would be interested.
Both of these events are representative of Xtar Sports’ efforts in keeping HBB China as its client and its increasing influence in the relationship. Improved resources allowed Xtar Sports to bring more opportunities to its partner firm and to develop the relationship. However, more significant is that trust during this phase became active trust in that Xtar Sports, the trusting firm, was more concerned about trusting as an end in itself (Huemer 2004a). This suggests that when firms become highly interdependent, trust will drive them to focus less on calculative motivations. Instead, the emphasis is more on the desire to maintain the relationship because of identification with and attachment to the partner (Geyskens, Steenkamp, Scheer et al. 1996) produced in past years, especially in difficult times. Ability and integrity have been influential in trust development at early phases in the relationship, but the effect of benevolence increased as the relationship between Xtar Sports and HBB China grew closer (Lewicki and Tomlinson 2003). When the relationship matured, there was a gradual disappearance of explicit consideration of credibility as a driver of trust (Young and Denize 1995). The goodwill of the parties towards each other became more influential in offering new opportunities for cooperation.
Cleve Steward, the Managing Director of International Division in Xtar Sports, “We can make tennis work and that’s why they came to us with things like Tiesto and we went to them with the Rolling Stones. Or if there were other projects that we could do together, we would do together, because there was enough trust there that we knew what the other side wanted or needed, and we could get right down to business instead of spending time chasing one another with phone calls and
210 proposals. We could just sit down at a meeting and say ‘ok, this is the opportunity. What do you think?’”
With the content of interaction going beyond the sponsorship-specific context, the relationship was transformed into a business partnership. More relational exchanges took place when both partner firms shared strategic information and helped each other on various occasions. In this process, an important change was observed in the structure of power in the relationship. Xtar Sports and HBB China started to work on more projects in addition to the tennis event. The diversified types of activities did not necessarily elevate Xtar Sports’ dependence on its partner. Up to this phase, Xtar Sports had grown to be a mature and experienced event manager with the possession of rich resources including professional expertise, solid government relationships and a positive reputation in the industry. These resources enabled Xtar Sports to manage more events and pitch more new clients, many of which were prestigious international brands. The extensive quality clientele that Xtar Sports had acquired resulted in a change of HBB China’s network position in relation to Xtar Sports, especially after the operation of the Tennis Masters Cup. HBB China was no longer the only priority for Xtar Sports and Xtar Sports had learned to balance the relationships with different clients instead of depending on any of them exclusively.
Alex Lee, General Manager, Xtar Sports, “Of course during the years of the HBB Open, we definitely depended on it (HBB China) very much…We had different roles. As the title sponsor, it (HBB China) was part of the organization…But since we operated the Tennis Masters Cup, though we still worked very closely with HBB China, its portion in the whole (of our business) did not increase but decreased, because the Tennis Masters Cup was a larger-scaled event and we’ve added other new businesses as well. And it (HBB China) may not be involved in all other businesses that we’ve developed.”
Mark Lueno, Executive Director, International Division, Xtar Sports, “In our business we can’t really depend on anyone too much, because marketing conditions change. SARS is a perfect example. Who would have thought of SARS. Beverage sales crashed. No one was going out.
211 So for 6 months, HBB sales dropped and we all suffered with that. Who would have known that they would be able to recover (from) that. I don’t think they still have fully recovered in Southern China the sales volume that they used to have.”
When Xtar Sports was better positioned in the industry and became less reliant on HBB China, HBB China may have increased its dependence on its partner, when it shared with Xtar Sports its strategic plans, consulted Xtar Sports for advice on other investment projects and asked Xtar Sports to help with the market challenge in southern China. After it had learned more about what Xtar Sports could offer, HBB China started to use the relation as a resource. This resulted in increased investment and commitment by HBB China to the relationship. This was driven by its strengthened trust in Xtar Sports, which, as a consequence, led to an improved balance of power in the relationship, with both firms highly interdependent and able to influence each other. Being a derivative of the changing structure of trust in the relationship, the balanced power structure was also an indication of more equal contributions from the partner firms to each other in the future.
At a certain point during this phase, the level of trust that Xtar Sports and HBB China placed on each other may have reached its peak. However, it is still being driven by the ongoing dynamic process of interaction in the relationship. Competence trust played a key role in upgrading the sponsorship-bound relationship to a substantial partnership, while goodwill trust permeated daily operations. Though the critical events as discussed early in this section proved both firms’ professional expertise and their benevolent commitment to the relationship, they did not trigger further changes in the nature and structure of trust, rather, they helped to maintain the trust developed between the partner firms at a high level. A stable equilibrium was established in the relationship with the patterns of actions and interactions reproducing and sustaining the firms’ perceptions and beliefs about itself and the partner, which contribute to the depth and structure of trust. The trust was reinforced through the mutual benefits achieved in the relationship, with each firm able to bring opportunities to the other to help with their marketing objectives. There was a shift from explicit trust to a habitual and confident state of lack of conscious trust during this phase, hence, the impact of trust becomes less obvious and
212 observable. Table 8.2 summarizes the analysis of the transitioning phase in the XtarSports-HBB relationship.
213 Table 8.2 Major features of transitioning phase in XtarSports-HBB relationship (2002-2004)
External Internal Relational objectives Content of Interaction Dynamics of trust environment environment Trust development Role of trust HBB China: HBB China: HBB China: Interaction in both contractual and --Gradual disappearance --Trust becoming a Increasing --HBB Headquarters --To exploit the event extra-contractual contexts, coupled of explicit consideration habitual and confident competitiveness in the in China relocated to sponsorship with intensified social exchange of competency and state of lack of conscious beverage market in Shanghai from investment for brand --High level of resource ties credibility as a driver of trust, leading firms to be China Hongkong; promotion in China; --High level of activity links trust; less focused on --Organizational --To use the --High level of actor bonds --Trust being maintained calculative motivations restructuring with relationship as an --High level of schema couplings by benevolence but emphasize on the major personnel external source for displayed by partner desire to maintain the change; marketing firms and mutual benefits relationship; --Marketing strategy achieved in the --Trust driving the being adjusted relationship; expansion of the --A stable mode of relationship Xtar Sports: Xtar Sports: Xtar Sports: dynamic equilibrium --Tennis market in --Completing --To secure HBB being established Shanghai continuing organizational China in a long-term to develop; restructuring; relationship; --More prestigious --Alex Lee promoted --To expand the scope international sports to be the new General of cooperation to events being Manager; further develop its organized in Shanghai --Closer relationship own businessG and Beijing as with the local opportunities for government sports sponsorship
214 8.6 Discussion of propositions Propositions 4 and 5 concerns the impact of changes in a firm’s resources, self- perceptions and beliefs in its partner firm on the nature and extent of trust placed on the partner firm. These propositions are supported in the learning phase. The events occurring in the transitioning phase provide further support. For example, Xtar Sports’ success in staging the first music event, the DJ Tiesto concert, reinforced the belief of HBB China in its partner’s capability of event management as well as its solid relationship with the local government, which led to enhanced calculative trust in it.
The analysis of the transitioning phase also reveals that, as a relationship matures with the firms experiencing repeated interactions and being familiar with each other, the changes in firms’ resources, self-perceptions and beliefs in its partner firms happened more slowly, leading to increased stability of trust in the business relationship. As Xtar Sports and HBB China continually behave professionally and considerately to produce mutual benefits in the relationship, their trust in each other does not keep expanding but reaches a kind of stable state. Their beliefs in each other are less likely to change when expectations are met and similar results are reproduced over time through the actions and outcomes occurring. A kind of diminishing returns of trust arises as satisfactory interactions grow. As a result, trust does not necessarily continue to change as firms go through learning, adapting and interacting processes. This supports Proposition 7, which states that as a business relationship matures, trust can reach a dynamic equilibrium whereby its nature and extent does not vary with ongoing interactions but remains stable over time as the interacting, learning and adapting in the relationship produce and reproduce similar results.
8.7 Discussion of mechanisms 8.7.1 Mechanisms related to trusting attitudes A key feature of trust development in the transitioning phase is the achievement of a stable state of trust between the focal firms; that trust doesn’t continue to grow as firms go through learning and interacting processes. This implies that when a relationship matures, firms may reach “cognitive inertia” (Good 1988). This could be explained possibly by an institutionalizing mechanism. When focal firms live up to the expectations of their partners’ repeatedly, the partner firms develop a concrete
215 confidence in each other in terms of capability, integrity and benevolence. The satisfactory practices in the relationship become institutionalized as routines in minds and in behavior. With standard operating procedures established, new knowledge is not created and existing knowledge remains stable over time. So does the comparison between expectations and performances. General evaluation of partner firms’ performance becomes minimal when a relationship gets stable and mature (Ford 1980a), especially when there is a consistent perceived fit between expectations and performances. With similar results reproduced over time in the relationship, firms’ beliefs about their partners are less likely to change. In this way, the level of trust is maintained and reaches a stable state.
Underlying the institutionalizing mechanism is the expectancy confirmation effect that the experience and outcomes of interactions do not cause further changes in firms’ self- perception and beliefs in partners as long as they are not too damning (Darley and Fazio 1980). This implies that the comparative evaluating mechanism based on expectations as identified in the learning phase will not be activated in a mature relationship unless firms fail to meet the expectations by their partners. However, analysis of the transitioning phase reveals that exceeding expectations is another way the expectation- based evaluating mechanism works to impact the level of trust. The effect can be noticed in the fact that the trust of HBB China in Xtar Sports was fortified by the favorable performance of Xtar Sports in providing more value to the partner firm than expected, such as conducting extra marketing for HBB China to help with its declining sales, successfully operating DJ Tiesto’s concert in China and paying for the Dutch tennis player for the HBB Open out of its own pocket. These findings reveal again how contexts in a relationship affect the operation of mechanisms. When a business relationship becomes stabilized and mature, firms need to go beyond the terms of the contract to move the relationship to the next level (Narayandas and Rangan 2004). Therefore, the evaluating mechanism operates more actively when firms take extra-role behaviors to exceed the expectations by their partners. A firm’s success in acting beyond the expectations enhances favorable beliefs in the firms, which results in trust being fortified. The XtarSports-HBB case does not find such events but failed efforts in extra-contractual contexts can have a destabilizing effect that lead to the weakening of trust (Narayandas and Rangan 2004).
216 The experiential learning mechanism functions in the transitioning phase as well but in a different way, compared to the learning phase. As the relationship matures with repeated interactions and a high level of familiarity and predictability established, learning becomes a less deliberate and conscious process, thus, the effect of the experiential learning mechanism is less apparent. The majority of the key events in this phase are not those taking place in the daily operations of the HBB Open and the Tennis Masters Cup, but those in emergencies when the environment changed. This shows that firms are more impressed by their partners’ performances in unusual situations, indicating that the experiential learning mechanism is more active in some circumstances, such as when an unexpected emergency takes place. For example, Xtar Sports’ immediate response to the last-minute cancellation of the Rolling Stones concert, coupled with its efficient and effective plans for crisis management, deeply impressed HBB China. Since this was one of the few emergencies the focal firms faced in the relationship, the professionalism and competency exhibited by Xtar Sports in dealing with the situation boosted HBB China’s confidence in its partner, leading to the strengthened trust placed in Xtar Sports. If everything had gone smoothly there would be no opportunity to learn how committed and competent Xtar Sports is.
8.7.2 Mechanisms related to trusting actions Trust is weakened through not being used (Gambetta 1988). In the transitioning phase, trust has played a key role in driving the further development of the relationship. More trusting actions are observed in this phase, affected by situational factors including partner firms’ resources, culture and strategy.
The most significant event that marks the transitioning of the relationship to a partnership is the agreement between Xtar Sports and HBB China to cooperate on the DJ Tiesto concert. This is a trusting action which manifests the well-established trust each firm has developed in the other that made the firms confident when expanding the cooperation into a brand new area. The analysis of the emergence of this event shows that it is connected to two other events, underlying which are the operation of an evaluating mechanism and a coping mechanism.
Firstly, HBB China was granted more marketing budget by its Headquarters in Europe which allowed it to stage more events to promote its brand in China. This was a key
217 motivating force that encouraged HBB China to initiate the formal discussion with Xtar Sports regarding cooperating on new events. The existence of supportive corporate strategy and sufficient resources enabled HBB China to do more with Xtar Sports, thus, enhancing its inclination of proceeding with a trusting action, i.e. cooperating on new projects. This observation reveals the operation of an evaluating mechanism in a different way. In this event, the evaluating mechanism refers to a process whereby firms evaluate resources needed to act trustingly and compare them to the resources available to determine how ready they are to proceed with trusting actions. This explains HBB China’s initial decision to decline Xtar Sports’ early proposal of working on more events, due to its shortage of marketing budget and staff. A lack of sufficient resources impaired the development of HBB China’s intention to take trusting actions, i.e. agreeing to expand the cooperation to new areas.
Secondly, when invited by HBB China to be the event manager for the DJ Tiesto concert, Xtar Sports did not agree immediately but seriously considered what it could gain out of the new project and whether it had enough resources to stage a music event, which was a brand new business for the firm. The prudence of Xtar Sports presents another example of the functioning of an evaluating mechanism, but more importantly, it reveals the awareness of Xtar Sports of the risks involved in the new cooperation, given its absence of experience in the music industry and the possibility of having its reputation tainted if it failed. This indicates the context in which a coping mechanism exists and operates. The presence of environmental uncertainty brings forth the need for trust (Iacobucci and Hibbard 1999) as firms are more likely to rely on their trust in the partner firms to have a better handle on the risks and uncertainty. The final agreement to take over the music event reflects Xtar Sports’ strategy of coping with the unpredictability in that given environment by relying on its trust in HBB China’s business sense and goodwill to its partner.
The key events in the transitioning phase reveal that the use of trust could be influenced by more complex mechanisms. HBB China’s approaching Xtar Sports with the project of the DJ Tiesto’s concert gave Xtar Sports a strong feeling of being trusted, which motivated it to trust the partner in return in terms of its sense of business and benevolence. This suggests the existence of a reciprocity mechanism which impacts on the development of firms’ intentions to take trusting actions. Reciprocity mechanisms
218 are psychological mechanisms, referring to the process that when a firm sees its partner firm acting in ways that imply its trust in it, the trusting action induces more trust in the trustee, especially in terms of its benevolence (Lewis and Weigert 1985; Madhok 1995). The trusted firm becomes more inclined to take similar trusting actions in return. The operation of a reciprocity mechanism is based on the assumption that unilateral positive behaviors will be reciprocated in kind, which is consistent with predictions about the symmetry of affect in exchange made in Heider’s (1958) theory of balance in dyadic relations.
Some researchers have posited that trust begets trust (Creed and Miles 1996; McAllister 1995). The analysis of the trusting behaviors of Xtar Sports and HBB China reveals a more complicated circle that involves feedback loops. It is a firm’s visible trusting actions that beget trust by its partner, leading to future possible trusting actions in response. Firms that expect partners to cooperate more are more likely to be cooperative, thereby setting in motion a “virtuous circle” in which trust promotes cooperation and cooperation promotes trust (Putnam 1993). Though it does not happen in the XtarSports-HBB case, I assume that the reciprocity mechanism could work in a vicious manner as well, such that a firm’s distrusting actions lead to a decrease in the distrustee’s perceptions of the benevolence of the distrusting firm. This eventually hampers the distrustee’s reliance on trust in the relationship. The reciprocity mechanism implies the existence of a kind of interaction multiplier effect of a firm’s actions in a business relationship on the building of trust.
The operation of a reciprocity mechanism could be moderated by the evaluating mechanism whereby firms evaluate the compatibility between corporate objectives and relational benefits, as well as the consistency between resources available and those needed for taking trusting actions. The early analysis of Xtar Sports’ agreement to stage the music event as requested by HBB China illustrates this point. A match in corporate objectives and relational benefits promotes reciprocity that results in more trusting actions taken by trustees. This is in line with social exchange theory which suggests two drivers of human behaviors in relationships, namely, desires to achieve one’s own outcomes and equitable outcomes for the partner. When the latter is possible, reciprocating behaviors are likely to happen (Emerson 1976).
219 In summary, trust plays a more active role in driving relationship development in the transitioning phase. With the interaction expanding into new types of business, the relationship is thrown into a changing environment that has increased levels of uncertainty and requires focal firms to reassess their strategies and objectives for the relationship. As a result, coping mechanisms and evaluating mechanisms become salient and impact firms’ intentions of taking trusting actions in a new environment. In addition a reciprocity mechanism is identified to further explain the emergence of trusting actions in the relationship. Where a firm takes unilateral action to elicit trust on the basis of positive expectations about its partner and such behavior is predicted to be reciprocated (Burt and Knez 1995).
220 Chapter 9 Case Analysis of XtarSports-HBB Relationship ---Rebuilding phase (2005-2006)
9.1 Overview Figure 9.1, which is Phase IV from Figure 6.1, presents an overview of the relationship development in the rebuilding phase. Much less events have occurred in this phase, indicating reduced interaction between the focal firms. The phase started with major organizational changes in Xtar Sports and HBB China. The personnel change in Xtar Sports led to adjustment of the power structure within the company, while HBB China experienced a huge structural and personnel change, which triggered further changes in its corporate strategy and culture. These changes signaled an altered environment of interaction in the XtarSports-HBB relationship. As shown in the Figure, the reduced interaction between Xtar Sports and HBB China is directly linked to the events related to organizational changes. The schema couplings were disturbed and the activity links, resources ties and actors bonds were restructured. The majority of interaction took place in a strict sponsorship-specific context, the same as when the relationship first began in 1998. This represents a new environment where trust exists and is used in the relationship.
221 Figure 9.1 Summary chart for XtarSports-HBB rebuilding phase (2005-2006)
InE/X/Ppl InE/H/Org
OC/RES3 InE/H/Ppl
XCP1/S
XCP2/S
FFA/X/Ppl InE/H/Strat HCP2/S InE/X/Pwr
FFA/H
FFA/X ReE/Ppr FFI(-)_
OC/RES4
Environmental factors Process: InE: internal environment I: interaction ExE: external environment A: activity ReE: relational environment R: resource Strat: strategy S: schema TMkt: tennis market ExR: extra role BMkt: beer market Soc: social Org: organizational structure Biz: business Ppl: personnel structure Outcome: Ppr: personal relationship OC: outcome Pwr: power structure Perf: performance Actor: RES: relationship evolutionary status H: HBB Links and symbols: X: Xtar Sports Sequential link TP: third party Transformative link XCP: party connected to Xtar Sports + positive/more HCP: party connected to HBB - negative/less FF: focal firm
222 9.2 External environment Compared to the market in 1997 with less than 0.01% of the Shanghai population being amateur tennis players, by the year 2006 the tennis population in Shanghai reached 540,000, approximately 4% of Shanghai population (Research Center of Event Statistics 2006). Tennis had become one of the most popular sports in Shanghai.
The Shanghai Municipal Government continued to support the development of the tennis market. In 2005, to prepare for the upcoming Tennis Masters Cup in Shanghai, the government sponsored the construction of the Shanghai Qizhong Tennis Center, which is a state-of-art stadium for tennis events. The burgeoning market of tennis coupled with the strong support of local government gave Xtar Sports more confidence in operating tennis events and drove it to stage more premium events in Shanghai.
A number of prestigious international sports events had been staged in Shanghai, including the Tennis Masters Cup, Formula One, the Table Tennis World Cup and NBA China games. The successful operation of these events helped to improve the sponsorship skills of existing sponsors and cultivate the desire in more companies to participate in sports sponsorship. More companies became interested in event sponsorship and more knowledgeable about how to leverage the sponsorship. This trend later provided Xtar Sports with opportunities when it was looking for a company to be the new Founding Sponsor of the Tennis Masters Cup when HBB China withdrew.
During this period, the sales of HBB began to recover. Compared to the performance in 2004, HBB’s global sales increased by 19% in 2005. In the Chinese market, the sales of HBB stopped decreasing in 2004 and increased by 12% in 2005. During the promotional period for the Tennis Masters Cup from September to November, 2005, the sales increased by 30%. In 2006, HBB China achieved its first break-even in the Chinese market since 2001.
9.3 Internal environment
223 The strong and close link between Xtar Sports and the local government over the years has benefited the company in many ways including allowing Xtar Sports to gain access to exclusive government resources as well as helping it to recruit new clients. However, during this stage, such a close government relationship became one of some delicacy, when it began to interfere with the business development of Xtar Sports. This is seen in a critical event occurring in 2006.
In 2005, the municipal government recommended four Chinese banks to Xtar Sports as sponsors to the Tennis Masters Cup. Xtar Sports managed to sign a sponsorship deal valued at USD$250,000 with each of them. However, in 2006, the government voiced its concern that there were too many state-owned banks sponsoring the Tennis Masters Cup, which was not appropriate for the fair competition among those banks nor for the overall healthy reputation of the Tennis Masters Cup. Therefore, Xtar Sports had to pick only one state-owned bank to be its sponsor. Though Xtar Sports raised the sponsorship fee to USD$500,000, it still lost a substantial amount of sponsorship revenue, which resulted in lower budgets for event management and client services for that year.
Xtar Sports remained stable during this phase regarding its own organizational structure, however, it was affected by a personnel change in its parent company, the Eagle Group. In late 2004, Landers Kong, a well-known news presenter, former Vice President of the Shanghai TV Station and former spokesperson for the Shanghai Municipal Government, joined the Eagle Group as its Deputy General Manager. He was in direct charge of Xtar Sports. Mr. Kong’s outstanding career background, coupled with his very extensive and deep relations with media and government, granted him great power over Xtar Sports. His tight control over Xtar Sports did not appear until 2005 when he began to become personally involved in the management of the tennis event. This meant more pressure from the local government regarding the operation of the tennis event, especially the management of sponsors from home and abroad. Internal conflict in Xtar Sports between the foreign and local teams seemed to be unavoidable. As it turned out, the majority of the disagreement was about how to allocate the benefits among domestic and international sponsors.
At the core of Xtar Sports were two teams working independently with various clients. The local team, headed by the General Manager Alex Lee, was in charge of managing
224 domestic clients, especially those recommended by the government, while the foreign team led by Mark and Cleve was responsible for recruiting and servicing foreign clients, such as HBB China. As Xtar Sports grew its business, the local government helped to bring in many domestic clients that were big names in their industries. Though it was generous support from the government, the local team in Xtar Sports also felt the obligation to fully satisfy these clients so as to maintain the government relation. Therefore, they would provide the Chinese clients with special treatment, possibly at the expense of international clients, which was not acceptable to the foreign team, who were trying to abide by the contract to deliver full benefits to the international sponsors, especially to HBB China.
Though the conflict could be explained in part by the cultural differences between the local and foreign teams, more noteworthy was the shift in the internal power structure. The foreign team was withdrawing to the weak side of the power wrestling as a result of three kinds of changes.
Firstly, as discussed in the previous chapter, the network position of HBB China as perceived by Xtar Sports was weakened when the HBB Open was replaced by the Tennis Masters Cup. Accordingly, Xtar Sports’ reliance on HBB China declined, leading to the diminishing power of HBB China in the relationship. The fact that the conflict over sponsorship benefit allocation seldom took place during the years of the HBB Open confirmed this point. Secondly, with Xtar Sports’ extended clientele, especially the development of heavily-investing Chinese sponsors, the revenue generated by the international clients dropped. This affected the importance of the international division headed by Mark and Cleve. Thirdly, as Xtar Sports matured as a well-established event management firm with sufficient resources, the local team relied less on Mark and Cleve for recruiting and servicing clients. Hence, the contribution that Mark and Cleve could make to the company became limited. As a result, they lost part of their negotiating power with the local team.
The internal conflict in Xtar Sports could be more telling than its appearance. It uncovered the different perceptions that the local and foreign teams held of HBB China, leading to different perceptions of the relationship. This is illustrated in the following event.
225 Ms. Jay Fong joined Xtar Sports as the new account manager in early 2006. Jay’s main responsibility was to manage the relationships with and to provide services to key clients, including both domestic and foreign ones such as HBB China. This involved coordinating with the two teams in Xtar Sports to allocate the limited corporate resources to fulfill the sponsorship benefits and organize events for sponsors as client services. During the Tennis Masters Cup in 2006, Jay organized a cocktail function for sponsors and successfully convinced HBB China to be the sponsor for beverages and gifts for the event. As Jay managed to get the support from HBB China out of her own good relationship with the local team of HBB China, she did not report this to Mark and Cleve for their assistance or approval. However, to her surprise, Mark and Cleve were very upset when they found out, being worried about losing control of the relation with HBB China. As a result, they decided to reposition Jay in the company and appoint another person that they trusted to manage HBB China in 2007.
This turns out to be a revealing event as it focuses attention on the very strong emotional bonds that the foreign team had developed with HBB China over the years. Mark and Cleve viewed HBB China as a family member with whom they had experienced better and worse times together in the past 8 years. As a matter of fact, in the interviews, Mark and Cleve never concealed their respect and gratitude towards HBB China for its generous contribution to the relationship as well as to the development of the tennis market in Shanghai. This attitude towards HBB China explains why the foreign team always treated HBB China as a priority client and used every possible means to make it happy and keep the relationship, even when HBB China reduced its investment in the sponsorship. Another typical event to illustrate this occurred in 2006.
In early 2006, due to the restructuring of its marketing budget, HBB China informed Xtar Sports that it decided to downgrade its status from being a founding sponsor in the Tennis Masters Cup to a premium sponsor from 2007. Xtar Sports then made a customized sponsorship proposal to HBB China and got it signed for another 3 years from 2007 to 2009. However, later, based on the sponsorship effectiveness in the Tennis Masters Cup in 2006, HBB China asked if Xtar Sports could replace its benefit of having a VIP bar with a counter bar during the TMC in 2007 so that they could have
226 more exposure in the event. Since the contract was already signed with authorized sponsorship benefits clearly stated, Jay Fong, the account manager, discussed the issue with Mark and was instructed to do whatever HBB China wanted to please them. Consequently, Xtar Sports agreed to make the adjustment in the contract for HBB China as requested, which was not a usual business practice. The flexibility of the foreign team in Xtar Sports in dealing with business issues reflects their loyalty and commitment to the relationship with HBB.
The foreign team’s strong attachment to HBB China and the appreciation of the relationship with it lead to the different strategies it used in interacting with HBB China at this stage of the relationship. This will be discussed in more detail in the next section.
HBB China went through dramatic changes in its organizational environment in 2005 and 2006. To reaffirm the commitment to Greater China, HBB Asia Pacific Ltd. (China) (HAPLC) set up HBB-ABL (China) Management Services, Co., Ltd. in June, 2005. This Shanghai-based subsidiary has since undertaken HAPLC’s responsibility to oversee its operations and investment activities in China.
In March, 2006, HBB China announced the closure of HBB Trading (Shanghai) Co. (HTSC) as its fully-owned subsidiary in China. HTSC had been the sales and distribution arm of HBB in China in charge of all the imports, sales and marketing of HBB products since HBB entered the Chinese market in the mid 1990s. After the closure, the HBB brand was still managed by HBB in Europe but HAPLC would take over the management of the marketing and sales of HBB products in China, including deciding marketing budget and strategies. This indicated the withdrawal of the European management team in the daily operation of its business in China. A new team composed of more local staff would be in charge. Gone with the European team was the old school of European corporate culture, which affected the schema couplings between HBB China and Xtar Sports, especially the foreign team in Xtar Sports. Though Xtar Sports was still close to HBB senior management in Europe, the close ties had much less impact on the development of the relationship from then on.
The change in the nature of the relation caused by the internal changes in HBB China is indicated by an event in mid 2006. Before the Tennis Masters Cup, Mark sent an email
227 to HBB Headquarters in Europe regarding sponsorship issues. The Headquarters replied and asked Mark to write to the designated contact person in HAPLC to deal with the sponsorship business, who would forward the email to them if necessary. This exemplified the retreat of HBB Headquarters from the front stage of managing sponsorship projects in China, consistent with the mission of HAPLC, which affects the exercise of power in the relationship. Xtar Sports’ close working and personal relationships with HBB senior management in Headquarters would not facilitate interfirm cooperation directly and hence, the resource of personal relationships between the senior management teams becomes dormant at this stage.
The restructuring in HBB China was interpreted by news analysts as an action to reduce HBB China’s operating cost, which was under pressure due to less than satisfactory sales in China. This change triggered major personnel changes internally, especially in the marketing department. The marketing department of HTSC was dismissed along with the company closure and four of its long-serving employees were sacked. This meant that Xtar Sports had to work with a brand new marketing team in HBB China in the Tennis Masters Cup in 2006. Changes on one level introduces changes on another (Freytag and Ritter 2005). The structural and personnel changes in HBB China disrupted the existing ties between Xtar Sports and HBB China, especially in terms of the schemas of each party and how they matched. This led to a process of rebuilding trust between the two partner firms.
9.4 Process of interaction in the relationship This phase of the relationship witnesses the growing independence and professionalism of Xtar Sports as an event management company after years of learning and practice. The relationship seems to be pulled back to a business friendship level (Wilson 1995) by the significant changes in the organizational and personnel structures in HBB China. This damaged the stability of the relationship environment with damage to established resource ties, activity links, actor bonds and schema couplings. The majority of interactions during this phase were market exchange in a sponsorship-specific context. New rounds of learning and adaptation were triggered in the partner firms, and the future of the relationship became uncertain.
228 In 2004, Shanghai won the hosting right for the Tennis Masters Cup for three years starting in 2005. As a result, Xtar Sports terminated the operation of the HBB Open in 2005 and focused on the Tennis Masters Cup in the following years. Compared to the HBB Open, there were more globally renowned brands joining the Tennis Masters Cup as sponsors. Thus Xtar Sports needed to spend more time balancing its relationships with various clients from home and abroad. Despite being a founding sponsor, the role of HBB China in the overall sponsorship program was less prominent and its influence on the event decreased dramatically as it lost its title sponsorship. HBB China was no longer “part of the organization” (Alex Lee, General Manager, Xtar Sports). This implies a change in the network position of HBB China with regard to other clients of Xtar Sports, which results in Xtar Sports lowering its expectation of HBB China’s contribution to the relationship. HBB China’s withdrawal from its priority position in the relationship affected the content of cooperation, i.e. the involvement of HBB China in event management diminished over time. This was perceived by senior managers in HBB China as a turning point that marked the beginning of the downward spiral of its relationship with Xtar Sports.
Robert Smith, former Managing Director, HBB China, “I think the relationship indeed has changed, but that was more to do with the fact that the tennis tournament has changed. I think if you take a look at early days when it was really called HBB Shanghai Open, it was really our tennis tournament and it was between HBB and Xtar Sports…The structure of the tournament started to change. As you know, finally it evolved into the facts that they were to organize a Masters tournament on behalf of ATP in Shanghai, which means that in such a construction where it’s an official ATP Masters Tournament, you can not call it HBB Masters, whatever. We naturally felt that we had to step back a little bit more.”
In 2005, due to serious injuries, five star players, including Rafael Nadal and Andre Agassi, withdrew from the Tennis Masters Cup at the last minute. This left Xtar Sports in a situation that it had to replace these injured stars with others but not as well-known. The media, audience and sponsors all felt frustrated and disappointed. To sooth these disheartened parties, Xtar Sports made use of its good media relationships built up over
229 the past years for more supportive news coverage and offered the audience a discount of 40% on tickets for the Tennis Masters Cup in 2006. In addition, it coordinated with the injured star players and arranged their participation in photograph sessions for tennis fans and commercial activities for sponsors.
As a founding sponsor of the Tennis Masters Cup, HBB China did not get involved in crisis management in 2005 and nor did Xtar Sports do anything special to please its partner. This was in contrast to the case in the HBB Open in 2003, when a similar situation took place. In 2003, as Xtar Sports faced the pressure from the public after the withdrawal of two star players before the HBB Open, it consulted and worked closely with HBB China to cope with the situation, such as working out strategies to gain media support and public understanding. The different approach of Xtar Sports to crisis management in 2005 indicated its revised perception and expectations of HBB China in the relationship, caused by the revised network position of HBB China.
Xtar Sports’ revised strategy of crisis management reveals its growing maturity and independence as a professional event manager. The situation in 2003 was among the first crises that Xtar Sports had ever experienced since it staged the HBB Open in 1998. It worked with HBB China over crisis management out of its respect for HBB China, not only as the title sponsor to the event but also as a seasoned professional in managing such emergencies in sports sponsorship. It was a learning process for Xtar Sports. In 2004, Xtar Sports found itself in similar crisis situations when the DJ Tiesto’s concert moved from Shanghai to Chengdu and the concert of the Rolling Stones was cancelled at the last minute. The effect of early learning experiences came into effect at this later stage. The increasing independence of Xtar Sports further modified the power structure between the two firms in the relationship.
Cleve Steward, Managing Director, International Division, Xtar Sports, “We don’t involve clients in those kinds of sports specific issues because the last thing you ever want to happen is companies dictating what happens on the sports field. Sports have an independent integrity that you don’t want…I mean sometimes they do help or they may complain or they may not be happy or whatever it is. But sports operate independently. Most sports need to operate independently from
230 corporate involvements, because it looks like they are affecting the outcome.”
While Xtar Sports took steps forward with its growing expertise and independence as a professional event management company, its relationship with HBB China seemed to be in decline, especially after the dramatic structural changes in HBB. Stability in the relationship was broken and a new environment arose with increased levels of relationship uncertainty.
The impact on the XtarSports-HBB relationship caused by the internal changes in HBB China did not occur until 2006, when HTSC was closed in March and its business taken over by HAPLC. Since then, HAPLC was responsible for shaping marketing strategies and setting marketing budgets for HBB in China, while the HBB Headquarters in Europe was only the owner of the brand. The marketing department in HTSC was dismissed and only one marketing employee stayed after the organizational restructuring. Xtar Sports had been working with the marketing team in HTSC on the tennis event since the HBB Open was first staged in 1998. Close personnel relationships had been built between the two teams out of years of cooperation. Xtar Sports was disappointed at the sweeping personnel changes in HBB China and its staff voiced their concern about the negative impact on the cooperation and relationship development.
Peter Yan, Deputy General Manager, Xtar Sports, “It took some time to get familiar with the working manner of the new team, which could be a bit troublesome…In fact, we’ve been working with the HBB Shanghai team since 1998. This is quite a long history of cooperation and surely there would be emotional ties between us after years of collaboration. But now with the personnel change in HBB, such emotional ties became weaker.”
The internal instability resulted in HBB China’s late start in communicating with Xtar Sports in 2006 over its event sponsorship and its delayed launch of the marketing campaign during the Tennis Masters Cup. Xtar Sports lacked the knowledge of who to contact in HBB China regarding event marketing after its internal personnel
231 restructuring. As a result, HBB China missed a few marketing opportunities during the event. HBB China assigned its marketing team in Guangzhou to collaborate with Xtar Sports, but the new marketing team was less responsive to the events proposed and organized by Xtar Sports, as Xtar Sports perceives it. The commitment of HBB China to the relationship disappeared.
The reallocation of the internal business responsibilities in HBB China and the assignment of the new team from HBB Guangzhou to the Tennis Masters Cup project broke the stability in the relationship built over years. Such stability offered a background of predictability against which the future could be brought forward and partially controlled (Easton and Araujo 1994). Instead, a new relationship environment was created. The emotional bonds between the two parties changed and became weaker and the majority of interaction took place in a narrow way as defined in the contract. The XtarSports-HBB relationship now involved greater uncertainty and changed from a close partnership to a relation of arm’s length. However, the long-term interdependence between Xtar Sports and HBB China, especially the emotional ties that Xtar Sports had towards HBB China, based on past experiences, encouraged Xtar Sports to expect continuing exchange and future interactions. Such emotional ties in the relationship turned out to be an important source of power to support relationship continuity, regardless of the economic content. Xtar Sports set a down-to-earth relationship objective to keep HBB China in the relation as long as possible, though at an arm’s length at this particular time.
Driven by the new goal, Xtar Sports took initiatives in communications, trying to learn and build rapport with the new HBB team. This phase, therefore, turned out to be another exploratory phase in the relationship’s history, similar to the situation when the relationship was first established in 1998, with both parties learning and testing each other before the cooperation could be deepened.
Jay Fong, the Account Manager in Xtar Sports responsible for managing key clients including HBB China, would pay company visits and organize social activities with the HBB team, where her team could have more communications with and gain further knowledge of the HBB team professionally and personally. She would also invite the brand manager from HBB Guangzhou to nice dinners for more social interaction when
232 he visited Shanghai on business trips or personal holidays. In contrast to such informal communications between managers from Xtar Sports and HBB China, Cleve Steward, the Managing Director of the International Division in Xtar Sports, would attend regular meetings with the HBB team and make offers in phone conversations or at meetings to see if Xtar Sports could help with any project that HBB China would launch other than sports sponsorship.
These efforts to reduce the distance with the new HBB team reflect Xtar Sports’ commitment to the relationship. However, the process of building rapport with the new HBB team was not easy and smooth for two reasons. Firstly, the new HBB team was based in Guangzhou in southern China. The geographic distance determined that most of the communication between the two teams was faceless, taking place in the form of phone conversations and email exchanges. This could be a block to the establishment of communicators’ identities, hindering the building of rapport between the parties. Secondly and more importantly, the XtarSports-HBB relationship became more like a relation between two Chinese companies when the local team took over the management of HBB China. Consequently, the corporate culture of HBB China changed noticeably. The old European school that characterized easy-going and sociable personalities disappeared with the complete withdrawal of the European management team in China, while the local management team in HBB China turned out to be less sociable and approachable and more conservative. These changes in the corporate culture in HBB China became a roadblock to Xtar Sports’ attempts to building personal relationship with the new marketing team in HBB China.
Cleve Steward, Managing Director, International Division, Xtar Sports, “I think it (the efficiency of Xtar Sports and HBB China working together) certainly has changed. It has gone from more of a European (to a more localized team). And yes, it has changed the culture. For better or worse, it has changed.”
Jay Fong, Account Manager, Xtar Sports, “I still can’t say that there exists personal relationship (between me and the brand manager in HBB Guangzhou)…The main topics in our conversations were about business. Occasionally he (the brand manager in HBB Guangzhou) would come to
233 Shanghai on holidays. We would then go out for dinner, but still what we talked was mainly about business.”
During this period, many European senior managers in HBB China were reallocated to HBB branches in other countries and the HBB Headquarters withdrew from the power position in HBB China. Xtar Sports continued its tradition of building and maintaining friendly personal relationships with the top managers in Europe. Cleve Steward played golf and had dinner with the former marketing director of HBB China when he visited London for the Wimbledon Championship in 2005. In 2006, Xtar Sports extended an invitation to the newly appointed Chairman of HBB to Eric Clapton’s concert in Shanghai, which was accepted with pleasure. Xtar Sports perceived these relationships as an extension to the successful working relationships after years of smooth cooperation. And these strong close relationships have also turned out to be valuable resources for Xtar Sports. Although these top managers in HBB may not be able to produce direct impact on the relationship between HBB China and Xtar Sports any more, they could be great mentors to Xtar Sports especially at difficult times. Such relationship energy (Havila and Wilkinson 2002) has been valuable support to Xtar Sports that enhanced its confidence in managing the relationship with HBB China after the dramatic change in the organizational and personnel structures in HBB China.
Cleve Steward, Managing Director, International Division, Xtar Sports, “So we have such a strong relationship with HBB on a couple of different levels. Even if they can’t do specifically (anything to) help us, they can tell us who to talk to or make an introduction.”
The impact of the internal integration and restructure in HBB China produced an unanticipated change in the relationship when HBB China decided to take a step back in its tennis sponsorship in China, guided by the new marketing strategy. After reevaluating the marketing strategies, HBB China decided to shift the focus of marketing from sports to entertainment, such as sponsoring music events and movies, and restructured its marketing budget accordingly. In 2006, HBB China decided to decrease its sponsorship investment in the Tennis Masters Cup and became a premium sponsor in 2007, a second-tier sponsor in the tournament. The degrading of the level of
234 tennis sponsorship affected the XtarSports-HBB relationship as it indicated changes in the content of cooperation.
Though disappointed, Xtar Sports accepted HBB China’s decision with understanding and believed that opportunities still existed for it to deepen the cooperation with HBB China again, given the successful and pleasant experience of cooperation in the past years. Such a belief solidified Xtar Sports’ perception of HBB China as a long-term partner and reinforced its objective to keep its partner firm in the relationship.
Zoe Zang, former Client Service Director, Xtar Sports, “We had to accept their decision, otherwise, we would have to look for a new client. We didn’t want to lose HBB China.”
Since HBB China chose to scale down its sponsorship investment, Xtar Sports began to look for a new founding sponsor to replace it. An examination of the searching process of Xtar Sports revealed two important findings.
Firstly, compared to its door-to-door sales approach in 1997, Xtar Sports in 2006 was much more confident in itself and selective as regards to its future partners. Xtar Sports used its personal relationships with top managers in premium companies as well as its knowledge of the industry to work out a short list of candidates to contact. As pointed out by Mark Lueno, “We have been here long enough and we have been doing this long enough to know who (could be potential partners)…it’s a very short list, to be honest. We are not talking about hundreds of companies.” The change in the searching strategy reflects Xtar Sports’ growing experience and expertise. It was no longer necessary for Xtar Sports to sell itself hard but its history of working with world-class clients had gained it the referent power that helped to build its credible reputation and, ultimately, reposition its network identity in the industry. The reliable and successful relationships that Xtar Sports had had with its quality clients have become valuable resources in that they were used to create other resources such as the knowledge of the industry and access to third parties.
Secondly, the deeply-entrenched confidence motivated Xtar Sports not only to adapt its searching strategy for a substitute to HBB China but also to adjust its goals and
235 expectation of the upcoming new relationship. When Xtar Sports began its cooperation with HBB China back in 1998, the major expectation it set for the relationship was to benefit from the financial muscle of HBB China and to learn from its rich experience in sports sponsorship. However, in 2006, Xtar Sports had more to contribute to the relationship and at the same time, it was seeking more from its future client in addition to simply a financial contribution and brand power. History matters again in that it produces brand new conditions for the future relationship between Xtar Sports and its new partner.
Alex Lee, General Manager, Xtar Sports, “What we are doing now is different from what we did before. At present, we don’t need to find a company to learn from, but rather, we would prefer more to make rules for sports market…We are now more knowledgeable about the market in China and have gained much experience after operating HBB Open for so many years, so we would prefer to be a rule-setter instead of a rule- follower…We will try those companies that can bring benefits to both parties. There are more potential sponsors today compared to the situation 8 years ago. What’s more, they know better how to make full use of sports events. They are willing to take the advantage of sports events. This is in fact good for us, because sponsors are promoting the events for us in various ways.”
Figures 9.2 and 9.3 illustrate the sequences of and connections between key events identified in the transitioning phase. The codes of events used for the ETHNO diagram are explained in Table 9.1. Both figures are compatible to each other with a high level of agreement on the sequences of and connections among events, thus, confirming the interpretations of these events. The figures reinforce the early argument of the influence of environmental events on the relationship evolution. The major change in the rebuilding phase is the decreased interaction between Xtar Sports and HBB China. As shown in these figures, reduced interaction is linked to a chain of events related to changes in the internal environment of the focal firms, such as ABL taking over HBB China (event coded as “ABLHBB” in Figure 9.3) leading to the localization of the management team (event coded as “Hlocal” in Figure 9.3), assignment of a new marketing team (event coded as “HNewTMC” in Figure 9.3) and reduced involvement
236 of HBB Headquarters (event coded as “HHlesInv” in Figure 9.3). This implies that the focal firms’ responses to changes in the environment lead to changes in their perceptions and strategies that influence the frequency and content of interactions, which, in turn, impact the processes of relationship evolution.
237 Figure 9.2 Critical events in the rebuilding phase (2005-2006) HBB event Actor-focused event activity-focused event resource-focused event schema-focused event Xtar Sports event X-H Interactive event sequential connection effective connection Events with other parties External environment Fluctuating mkt performance of H. products in CH
Internal ABL taking New marketing over H. CH. strategy for H. CH Environment. Alex Lee Localization became Xtar of mgnt team GM in H. CH
Internal conflict Relocation of Landers Kong btwn foreign and Jay Fong, Acc. became deputy local teams in Xtar Mngr in Xtar GM of Eagle
Xtar won bidding New mktg for TMC for 3 yrs team working for TMC
Interaction in Less involvement of Xtar looking for Annual H. downgrading its H.Hdqters in TMC new founding Relationship operation of TMC sponsorship in SH sponsor TMC in SH
Less interaction btwn X Xtar agreed to modify Adjusted network & H contract for H. Closer personal position of HBB rela. btwn X&H Xtar initiating comm. w/h Xtar managing new H.team to build rapport reserved crisis on its own
Closer personal Xtar aiming to keep rela btwn X&H H. in the relation
Transitioning phase 2007 238 Figure 9.3 ETHNO event sequence chart for XtarSports-HBB rebuilding phase (2005-2006)
239 Table 9.1 ETHNO codes of key events for the rebuilding phase in Figure 9.3
ETHNO codes Explanation of event HinsSals HBB China's sales performance in China fluctuated
XnewGM Alex Lee was promoted to be the new GM of Xtar Sports EnewDGM Landers Kong became the Deputy GM of the Eagle Group XTMC3y Xtar won bidding for TMC for 3 years HAdjNP HBB China's network position as perceived by Xtar Sports was adjusted XConflct Internal conflict arose between foreign and local teams in Xtar Sports JFrepos An account manager in Xtar Sports was repositioned internally as required by the foreign team AnnTMC TMC was staged annually in Shanghai ABLHBB ABL took over the management of HBB China
HNStrat HBB China adopted a new marketing strategy under the management of ABL Hlocal The management team in HBB was localized HNewTMC HBB China assigned a new marketing team to work with Xtar Sports on TMC HHlesInv HBB Headquarters became less involved in the TMC sponsorship in Shanghai XHlesInt Xtar Sports and HBB China had less interactions in the relationship after the structural changes in HBB XcrisMgnt Xtar Sports managed crisis on its own ClserPRel Xtar Sports and HBB developed closer personal relationships XkeepH Xtar Sports aimed to keep HBB China in the relationship XiniCommH Xtar Sports initiated the communication with the new team of HBB China to build the rapport XmodHcont Xtar Sports agreed to modify contract for HBB China as requested HdownSpsr HBB China decided to downgrade its sponsorship in the TMC XsrchNSpsr Xtar Sports started to search for new founding sponsor to replace HBB China
240 9.5 Trust development during the rebuilding phase Relationship continuity does not always require a close relationship but may well be carried out at arm’s length (Selnes 1998). The XtarSports-HBB relationship, after years of smooth evolution, was challenged by the internal restructuring of HBB China in this phase. Trust played a pivotal role in keeping the relationship moving on.
The striking phenomenon of this phase was the sweeping organizational and personnel changes in HBB China. Together with the complete retreat of the European management in HBB China was the dismissal of the long-serving local marketing team that had been working with Xtar Sports on the tennis project since 1998. The changes interrupted the emotional bonds established between the partners and later led to HBB China’s decision to reduce the tennis sponsorship, guided by the new marketing strategy. These changes implied the decreasing dependence of HBB China on Xtar Sports and Xtar Sports losing its power over HBB China in influencing its opinions and decisions. However, it was not a big loss to Xtar Sports since it did not have much at stake with HBB China as many new cooperative projects had been developed with other clients. Xtar Sports no longer depended on its partner as much as before. Moreover, the fact that the foreign team in Xtar Sports began to lose their powerful position in the company also affected the priority of HBB China to Xtar Sports. In short, the internal power restructuring in HBB China and Xtar Sports dissolved the mutual interest between both parties, hence, provoking dramatic changes in the external power structure in the relationship such that the two firms depended less on each other.
The replacement of the marketing team in HBB China, especially the leaving of the European managers, broke the personal ties developed between individuals in Xtar Sports and HBB China, thus, breaking the ground on which trust existed in the relationship. The trust that Xtar Sports placed in HBB China, especially the affective trust, was grounded less on emotional ties between individuals but more on the emotional attachment the individuals in Xtar Sports have developed towards the organization of HBB China. Being the first client that witnessed and helped with the growing of Xtar Sports, HBB China sat a special position in Xtar Sports and was treated as “a family member” (by Alex Lee, General Manager of Xtar Sports). In particular, the trust in HBB China was seen in the form of a strong faith Xtar Sports had in the partner. Faith has been understood as an emotion relative to trust, based on
241 identification and attachment (Young 2001). Besides, McAllister (1995) points out that faith is an outcome of strong trust. At this critical moment of the relationship, Xtar Sports’ faith in its partner resulted in a high level of understanding and acceptance of HBB China’s performance in the relationship when new personnel were positioned. It also drove Xtar Sports to continue its efforts to maintain and revitalize the relationship by all means, despite the reduced investment of HBB China in tennis sponsorship. An example was that Xtar Sports remained to stay in close touch with the HBB team in China as well as its Headquarters in Europe so as to reestablish and maintain the same personal rapport as the one before. Xtar Sports’ emotional attachment to HBB China as a family member interacted with its confidence in HBB China’s marketing capability to construct the new ground on which trust was maintained. The confidence led to Xtar Sports’ calculative belief that HBB China would restore its market performance in China and come back to Xtar Sports as a big and key client in the future. Such confidence is observed in the following remarks.
Mark Lueno, Executive Director, International Division, Xtar Sports, “It (HBB China decreasing its investment in sports sponsorship) certainly won’t change our relationship at all, because I think—at least in the short term—HBB China is obviously going to cut back and be profitable and be aggressive in the market place to get the brand, where we can do other things with them, hopefully, music or jazz, their choice.”
In short, Xtar Sports’ trust in HBB China accumulated in the history of cooperation sustained the challenges in the rebuilding phase but was built on a different ground. The affective and calculative trust motivated Xtar Sports to remain committed to the relationship to ensure its continuity. This observation of the active role of trust conflicts with the view of Wilson (1995) that trust is latent in maintaining the relationship. When conditions change dramatically trust may become active in shaping responses, thus becoming a driving force in the relationship development.
A lack of data collected directly from the new personnel in HBB China did not allow a thorough analysis of how the trust of HBB China in Xtar Sports was impacted or maintained after the sweeping changes in the organizational environment within HBB. But the narratives provided by managers in Xtar Sports who were working with the
242 team in HBB China, revealed a few important and interesting findings. While the long history of a pleasant and successful cooperation between Xtar Sports and HBB China worked in maintaining the mutual understanding and respect, the new team in HBB China assigned to work with Xtar Sports over the Tennis Masters Cup seemed not to be ready to trust Xtar Sports in the way its predecessor did, as indicated in the following event.
In 2006, Xtar Sports was working with the marketing team from HBB Guangzhou on its sponsorship project for the Tennis Masters Cup. As usual, Mark Lueno, Executive Director of the International Division in Xtar Sports, would work closely with the client and offer advice to enhance sponsorship efficiency. This time, Mark suggested that HBB China could put up its brand logo at the gate of the players’ corridor so as to increase its media exposure whenever a player walked in and out. The brand manager from HBB Guangzhou hesitated to accept the advice and asked for more time to think it over. This was in contrast to the responses by the old team who would trust Mark’s advice and take it without a doubt. The brand manager later agreed with Mark’s suggestion. When the event was over, the evaluation reported that the HBB logo at the gate of the players’ corridor was in every shot and turned out to be the most effective point of exposure. The brand manager from HBB expressed his gratitude to Mark for his advice afterwards.
This event illustrates the point that when the environment of trust changes, triggered in this case by personnel changes, the behavioral intention to trust the partner firm can hardly be inherited from the history but needs to be reinstalled through the hands-on experience of interaction with the partner firm. Previous research on the dynamics of personal trust in business relations may help to explain this. Levinthal and Fichman (1988) reported after an empirical study that a change in the senior management of the client may mitigate the importance of the prior history of relations, no matter how long and successful the personal relationship has been. This is supported by Zaheer, Loftrom and George (2002) that senior managers develop trust in their counterparts not by examining successful public achievements but by examining several aspects related to their individual characteristics including personal skills and interests. This underscores the important role of personal trust for the sustainable development of business relations. Furthermore, with the availability of a history of successful cooperation in the
243 past, the consideration of relationship development and continuation is motivated less by calculative concerns and more by the benevolence of the individuals representing the partner firm (Geyskens, Steenkamp, Scheer et al. 1996) when the environment changes. Once a high-level of affective trust is developed through actual experiences, it may become incorporated into a stable picture of a partner firm’s motives and the foundation of calculative trust may no longer be needed (Holmes and Remple 1989; McAllister 1995).
After almost ten years of cooperation, trust was experience-based and had developed based on interactions over time. However, the internally inconsistent perception of HBB China by the two teams in Xtar Sports reflects the influence of culture on the selective memory of the past. The foreign team treated HBB China as a life-long close friend and was forever grateful for its contribution to the tennis event and development of the tennis market in Shanghai. The strong loyalty of Mark and Cleve to HBB China translated into a desire to do all that they could to please HBB China. In this sense, affection-based goodwill trust serves the valuable function of keeping the relationship moving on. However, the Chinese team in Xtar Sports adopted a more practical strategy to trust that matched its investment in the relationship with HBB China to the value of the partner firm as a client. The motives behind their efforts to keep HBB China in the relationship were mainly the hope for their market revival before being active again in sports sponsorship. Such distinctions between the foreign and Chinese teams in Xtar Sports reflect the contingent and dynamic nature of trust in that, under certain circumstances, trust could be maintained by either emotions of faith, gratitude and affection (Young 1993) or more calculative cognition based on the power and capability displayed in the history of cooperation.
Table 9.2 summarizes the key features of environment, interaction and dynamics of trust in the rebuilding phase.
244 Table 9.2 Major features of rebuilding phase in XtarSports-HBB relationship (2005-2006)
External Internal Relational objectives Content of Interaction Dynamics of trust environment environment Trust development Role of trust HBB China: HBB China: HBB China: Majority of interaction occurring in --Trusting environment --Trust being a key --Increasing --Organizational --To keep minimum strict contractual contexts, with affected by major driving force in competitiveness in the restructuring with exposure in the TMC minimal social exchange changes in the maintaining the beverage market in major personnel --Medium level of resource ties relationship context; relationship when China; change; --Medium level of activity links --Trust becoming path- challenged by internal --HBB sales in China --Marketing strategy --Medium level of actor bonds dependent, maintained instability in partner starting to recover adjusted to reduce --Low level of schema couplings by emotions of faith, firms sports sponsorship gratitude and affection, or more calculative Xtar Sports: Xtar Sports: Xtar Sports: cognition obtained by the --Tennis market in --More involvement --To keep HBB China power and capability the Shanghai continuing of the local in the relationship partner firm has to develop; government in the displayed in the history --More corporations event management; of cooperation; interested and --Internal conflict -- Behavioral intention of experienced in sports between the foreign trust not to be inherited sponsorship team and local team from history but to be reinstilled through concrete experience of cooperation
245 9.6 Discussion of propositions Proposition 9 states that when a business relationship terminates, the combination of resources a firm has developed through the relationship influences the initial conditions of trust in future business relationships. The Xtar Sports-HBB case is not an example of a terminated relationship, however, the examination of the searching strategies that Xtar Sports adopts to look for a replacement to HBB China as a TMC founding sponsor in the rebuilding phase provides support for Proposition 9. The revised resource repertoire possessed by Xtar Sports, including its well-established reputation in the industry and record of cooperating with different clients, instilled in Xtar Sports strong self- confidence and different needs for complimentary resources from new partners, both of which set the ground on which beliefs of the new partner would develop that, in turn, affect the initial conditions of trust between Xtar Sports and a new partner. In comparison to the selection criteria applied in its first search for clients, the one that Xtar Sports uses ten years later is more sophisticated. It is seeking a partner with compatible power to work together as rule-setters in the market of event management and sports sponsorship.
9.7 Mechanisms underlying the dynamics of trust 9.7.1 Mechanisms related to trusting attitudes The existing conditions of trust in the XtarSports-HBB relationship are interrupted when a new marketing team in HBB China was assigned to work with Xtar Sports on the sponsorship program. This raises the issue of the extent to which the passing on of relationship energy to a new management team is possible and what mechanisms enable or prevent this. The analysis of the rebuilding phase reveals that the trust of Xtar Sports and HBB China develops in different ways. When the new marketing team in HBB China was positioned to manage the tennis sponsorship program, their trust in Xtar Sports was influenced by the initial beliefs about the partner (Lewis and Weigert 1985). The operation of a historical learning mechanism in the history of the relation is thus detected, as the new marketing team relied on the second-hand knowledge to develop their initial beliefs in the capability and professionalism of their partner. The second- hand knowledge could be gained from the learning of the history of long-term successful cooperation with Xtar Sports and from the communications with former colleagues and senior managers who were involved in the relationship. The initial
246 impressions shaped led to the cultivation of respectful feelings towards Xtar Sports, which sets the ground on which trust can be built (Young 2001).
Zoe Zang, former Client Service Director, Xtar Sports, “Though the team (in HBB China) is new, they must know a lot of the relationship and us. After all, we’ve been working together for over 8 years and had a good record of cooperation throughout.”
Mark Lueno, Executive Director, International Division, Xtar Sports, “I think the mentality (of trusting staff in Xtar Sports) was passed down from the top when the transition (in HBB China) was happening over the last 6 months. The old school guys were moving out and the new management team was coming and being integrated. It was like (the old guys telling the new-comers that) ‘this group of individuals know what they are doing, they have never let us down and we spent a lot of money with them and we have got fantastic results. So get your people to really take this stuff seriously.’”
However, true trust (Hardin 2004) is developed by real events, interactions involving the new personnel and affirmations of initial beliefs. As the interactions and exchange of information and services developed between the new team and Xtar Sports, the exchange mechanism is in operation and triggers experiential learning mechanisms whereby firms gain substantial experiences that reaffirm or weaken initial beliefs. This could be seen in Mark Lueno’s suggestion regarding the placement of the HBB logo during the TMC. As it turned out to be the most effective point of exposure, the new team in HBB China was convinced of its partner’s expertise in sponsorship, leading to the substantiation of calculative trust placed in Xtar Sports.
Xtar Sports’ trust in HBB China, which has developed over the years, was maintained in the rebuilding phase, despite the major personnel changes in HBB China. Though HBB China decided to step down in the tennis sponsorship program and became less active in cooperating with Xtar Sports in event marketing, Xtar Sports’ trust in the capability of its partner was not shaken. Xtar Sports remained committed and tried its best to keep HBB China in the relationship. Further, the lack of experience and
247 expertise in sports marketing of the new marketing team in HBB China did not lead to the disappearance of trust placed by Xtar Sports. Instead, these shortcomings were understood by Xtar Sports. As put by Mark Lueno, “They are a little green! But you know they are sharp. Remember, they are only dealing with one sports event a year. They have got to sell beer 364 others. That’s what they are good at…not this sort of stuff.”
These examples in the rebuilding phase point to the fact that Xtar Sports’ trust in HBB China was sustained by Xtar Sports’ faith in its partner firm. Faith, a deep level of trust, is gradually built as Xtar Sports gets fully convinced of the capability of HBB China as displayed throughout the history of the relation. But, more importantly, faith requires an emotional investment and the foundation of a strong relationship with affective attachment (Rempel, Holmes and Zanna 1985). By the time of the rebuilding phase, individuals in Xtar Sports had developed strong emotional ties not only with their colleagues in HBB China but with the organization as well. The existence of emotional attachment to the organization of HBB China played a critical role in maintaining the trust of Xtar Sports in its partner, when the personal ties were broken in the relationship after the turbulent personnel changes in HBB China.
Zoe Zang, former Client Service Director, Xtar Sports, “You have to know this, HBB is like a baby to our foreign team (in Xtar Sports) and they are as close as a family after working together for over 8 years.”
As pointed out by Schwarz (1990), such affective feelings are used by people as information when they make judgments about others. For example, people who are in a positive mood towards others evaluate their behaviors more favorably (Forgas 1992), hence, strengthening and enhancing the perceived trustworthiness of the others. Jones and George’s model (1998) is more explicit in depicting how affect may influence trust- related cognitions, including perceptions, beliefs and judgments. These observations and arguments point to an affective mechanism, in which personal affection may feed into calculative trust. An affective mechanism refers to a process whereby an individual’s affective feelings towards another individual or organization change and influence his/her judgment of the other’s behaviors, which in turn impacts other cognitive beliefs that consequently affect the level of trust. Compared with other
248 mechanisms of trust development, the affective mechanism sustains trust, especially when partner firms experience changes that cause instability in the relationship. As argued by McAllister (1995), trust based on care and concern is deeper and less likely to be broken than trust primarily based on cognitive perceptions of predictable behaviors. Based on the existence of affective states and attachments (Williams 2001), the operation of affective mechanisms complements the basis on which trust develops and maintains between cooperating firms.
In summary, the development of trust in the focal firms follows a different track in the rebuilding phase. The new team in HBB China inherits some trust as they learn about the successful history of cooperation but the hands-on experience helps to instill real trust in Xtar Sports. In light of this, trust is created and substantiated through historical and experiential learning. On the other hand, Xtar Sports experienced a process of sustaining trust. An affective mechanism is identified which involves emotional bonding in maintaining the level of trust.
9.7.2 Mechanisms related to trusting actions Fewer trusting actions were taken by the partner firms in the relationship during this phase. The key action is the persistent efforts of Xtar Sports to keep HBB China in the relationship despite the major changes in the organizational environment of HBB China and its reduced investment in the relationship. This is a clear and strong evidence of organizational commitment, which can be viewed as a trusting action taken by Xtar Sports. A social bonding mechanism, which is identified in the learning phase when the senior managers in HBB China were motivated by their emotional attachment to Xtar Sports’ personnel to stay connected with it, operates again in this occasion. Social bonding mechanism, as an emotion-based mechanism, is a process whereby the existence of personal affect motivates individuals to display their emotion in others and makes them inclined to cooperate. In this event, the personal affect is in the form of individuals’ faith and emotional attachment to the partner firm as an entity. As explained by the two American managers in Xtar Sports, HBB China was perceived not only as a business partner but a family member who has been supportive and caring to Xtar Sports throughout the years. This feeling is also mentioned by Alex Lee, General Manager of Xtar Sports, as quoted in the following. Such an emotion has promoted the development of individuals’ intentions to engage in trusting actions in the relationship
249 when necessary and possible, i.e. staying committed to the relationship despite HBB China’s reduced investment in the relationship.
Alex Lee, General Manager, Xtar Sports, “The relationship was very close. It was not a buyer-seller relationship but like a close tie in a family...I think such kind of cooperation is very firm and solid-grounded. It won’t change together with the change of management personnel.”
But the persistent efforts of Xtar Sports to keep HBB China in the relationship can also be explained by a self-efficacy mechanism. Self-efficacy mechanisms refer to how prior successful experience feeds into firms’ dispositions to take similar actions for goal attainment. The theory of self-efficacy contends that self-efficacy beliefs help determine how much effort people will expend on an activity, how long they will persevere when confronting obstacles and how resilient they will prove in the face of adverse situation (Pajares 1997). The higher the sense of efficacy, the greater the effort, persistence and resilience. The senior managers in Xtar Sports were convinced of HBB China’s competence in marketing, based on their experience of cooperation in past years. They believed that HBB China would revitalize its market performance in China soon and get back to the relationship with more investment and projects. Such high confidence in achieving relational goals in the near future, bred out of prior experience, made Xtar Sports approach the difficult situation in the relationship during this phase with the feeling of serenity and a willingness to persevere in its coping efforts.
While Xtar Sports spared no efforts in maintaining and revitalizing the relationship in the rebuilding phase, the responses from HBB China turned out to be slow and slack indicating a different mindset and response to the previous team. An expected reciprocal trusting behavior did not happen in this occasion. It is not necessarily due to a lack of sufficient trust in Xtar Sports placed by the new team in HBB China. A more relevant explanation is found in the operation of an evaluating mechanism. The rebuilding phase found HBB China shift its marketing focus from sports marketing to entertainment marketing. This new strategy meant that HBB China had adjusted its relational objectives for cooperating with Xtar Sports. It did not encourage increased exposure in the tennis event, which hampered the occurrence of trusting actions by HBB China. In light of this, Xtar Sports’ commitment to revitalizing the relationship, which is a form
250 of trusting action, did not produce reciprocal action from its partner, due to the lack of mutual fit of relational objectives between the focal firms. This is in line with the argument by Emerson (1976) that reciprocating behaviors are more likely to happen when desires for equitable outcomes exist between partner firms.
In summary, trust is actively used in the rebuilding phase by Xtar Sports as a way to maintain the relationship when the environment is disrupted. Two mechanisms, which are identified in early phases, operate again to impact the occurrence of trusting actions. The existing emotion-based social bonding mechanism plays a positive role in motivating Xtar Sports to act trustingly by staying committed to the relationship despite all the changes in its partner, while an economic-calculation-based evaluating mechanism functions in the opposite way in HBB China to hamper the taking of trusting actions by the new marketing team in HBB China. A lack of reciprocal trusting actions by the new team in HBB China reinforces the early argument that the existence of trusting attitudes does not guarantee the emergence of trusting actions. Instead, trusting firms have more to consider than trust before they decide whether or not to proceed with a trusting action.
251 Chapter 10 A Model of Dynamics of Trust in Business Relationships
Trust has been identified as a core success factor in the functioning of business relationships. However, as pointed out in Chapter 2, there is limited research regarding the way trust is built and how it functions in business relations over time. Trust is affected by a diversity of factors at various stages of a business relationship and has various types of effects on relationship performance and evolution. Trust development is not smooth and monotonic through the various phases of a business relationship but is affected by internal and external changes (Narayandas and Rangan 2004). Building and sustaining trust is an iterative process that intertwines with relationship development.
In this chapter, the analysis and discussion of the XtarSports-HBB relationship presented in Chapters 6, 7, 8 and 9 are summarized to provide answers to the research questions as follows:
o What are processes and determinants of the dynamics of trust in business relationships? o What are the underlying mechanisms that drive the dynamic process of trust in the relationship development?
This chapter comprises four sections. Firstly, a discussion of general patterns of dynamics of trust in business relationships will be developed, based on the findings in the main case. Following that, a model of the dynamics of trust in business relationship is presented, based in part on the conceptual model introduced in Chapter 4 and the results of the case analysis. In the third section, mechanisms underlying the dynamic process of trust as identified in the early chapters are summarized and discussed. Finally, a brief conclusion is provided.
10.1 Dynamics of trust in business relationships The dynamics of trust in the case involves two aspects, namely, condition of trust in another (trusting attitude) and trusting actions (trusting behaviors). These concepts involve two distinct but connected processes embedded in relationship evolution driven by a different but overlapping mix of causal mechanisms. The condition of trust is an
252 attitude, showing whether or not a firm has trust in its partner firm and is composed of two dimensions, i.e. the type or basis of trust and the degree of trust. Trust can be a mix of calculative and/or affective types at different phases of a relationship, while the degree or strength of each type of trust may increase or decrease over time as the relationship develops. The overall condition of trust is constantly being tested, changing or not as a psychological response to the experience and outcomes of the actions and interactions occurring in the focal and connected relationships. It is affected by the physical and cognitive outcomes of those actions and interactions such as a gain/loss of resources and a change in beliefs. A firm’s beliefs in its partner firm underlie how trustworthy the partner is perceived to be (Mayer, Davis and Schoorman 1995). Many kinds of beliefs may underlie perceived trustworthiness and here I follow the consolidated dimensions proposed by Mayer et al. (1995). In their scheme, a major portion of variance in perceived trustworthiness can be explained by perceptions of capability, benevolence and integrity. These beliefs provide the ground on which calculative and affective trust are built.
Despite trust developing throughout the relationship, the existence of trust does not always lead to trusting actions by firms. Trusting actions are partner firms’ strategic responses to a given environment. It reflects trusting firms’ decision of relying on trust to proceed with the cooperation. Barber (1983) explains trusting actions as the undertaking of a risky course of action in the confident expectation that all persons involved in the action will act competently and dutifully. Similarly, Mayer, Davis and Schoorman (1995) define trusting actions as outcomes of trust in the form of a trustor willing to make an affective link with a trustee and expose itself to business vulnerability by taking assumed risks. Smith and Barclay (1997) further identify five components of trusting actions, namely, relationship investment, influence acceptance, communication openness, control reduction and forbearance from opportunism.
A useful way of summarizing the way trusting actions take place is in terms of a modified form of the theory of reasoned action (TRA) by Fishbein and Ajzen (1975). Derived from previous research that started out as the theory of attitude and behaviors, the TRA theory was “born largely out of frustration with traditional attitude-behavior research, much of which found weak correlations between attitude measures and performance of volitional behaviors” (Hale, HouseHolder and Greene 2003, p259).
253 Under the TRA, action is hypothesized to be a direct function of intentions that people easily perform behaviors if they are inclined to do so (Ajzen 1985). The TRA suggests that behavioral intention depends on the person’s attitude about the behavior and subjective norms. Attitudes toward the behavior derive from beliefs about the consequences of performing the behavior multiplied by his or her valuation of these consequences. Subjective norms are a combination of perceived expectations about relevant individuals or groups along with intentions to comply with these expectations. Actions are ultimately determined by a person’s beliefs and their subsequent effects on attitude towards the act and subjective norms, which, in turn, influence behavioral intention, and through it, action (Ajzen and Fishbein 1980). The relationship between intention and its proximal antecedents can be described in the regression equation (Bagozzi, Gurhan-Canli and Priester 2002):
I=1Aact2SNe
In the equation, I refers to intention to act, Aact is attitude toward the act, and SN means subjective norms. is an intercept and e is an error term. 1 and 2 are empirically inferred regression weights reflecting the respective effects of Aact and SN on I (Bagozzi, Gurhan-Canli and Priester 2002).
In addition to these internal factors, Ajzen and Fishbein (1980) also identified a list of external factors that they claim have indirect effects on action, through the impact on attitude towards the act and subjective norms. These external factors include demographic variables, such as age, gender, occupation, socio-economic status, religion and education; attitudes towards targets, such as people, insititutions, brands and services; and personality traits, such as introversion-extraversion and self-esteem. The effects of these external factors are posited to occur in two ways. One is to impact directly on Aact and SN, the other by influencing 1 and 2, thus, modulating the relative effects of Aact and SN on I.
Though largely applied in consumer behavior studies in marketing, the theory of reasoned action provides a useful framework for understanding the trusting actions in business relationships by identifying the factors affecting the intention of taking such
254 actions. The existence of a trusting attitude is a prerequisite for trusting actions, i.e. it is unlikely for a firm to behave trustingly if it doesn’t have any trust in its partner. However, trusting actions are not guaranteed to occur in business relationships, even with the existence of trusting attitudes between firms. A firm’s attitudes towards taking trusting actions could vary at different points of time, therefore, trusting actions are only enacted in particular contexts. As observed by Lewis and Weigert (1985), one may trust cognitively without necessarily trusting behaviorally, and when one does trust behaviorally, s/he may only trust in some respects and contexts but not others.
According to the TRA theory, the behavioral intention, which predicts the actual behaviors, is determined by an individual’s attitude towards the act and his/her subjective norms. An attitude towards act is related to perceived consequences of the action. It is an outcome of the evaluation of the potential consequences of the act, while an attitude towards subjective norms is in nature a result of perceptions of the environment around the individual. This understanding allows an extension of the application of the TRA theory to understand the trust dynamics in business relationships, where individuals mostly act on behalf of their organizations. A firm’s intention to take trusting actions is determined by its perceived importance of trusting as well as behavioral readiness to act trustingly, both of which are affected by a wide range of environmental factors, including external, internal and relational environments.
An intention to act (such as to take a trusting action) is an additive function of the felt normative pressure to act (Ajzen and Fishbein 1980). This assumes something about the way cognitive processes work, i.e. the underlying mechanisms. A firm’s perceived importance of trusting is the counterpart of subjective norms in explaining intentions to act. The perceived importance of trusting reflects the firms’ perception and understanding of the social environment in which it exists and cooperates with other firms, leading to various needs and motivations to rely on trust in order to proceed with the cooperation. A particular environment presents those involved with incentives or pressures to act trustingly in relations. The existence of uncertainty and unpredictability in a business relationship makes cooperating firms acutely sensitive to their beliefs in the partner firm (Wilson 1988), affecting their disposition to rely on trust. For instance, a firm with weaker power in a new relationship may have to attach more importance to relying on trust in its partner in order to cope with perceived risks of opportunism and
255 allow itself to depend on the powerful partner in the cooperation. On the other hand, firms familiar with each other and cooperating in a stable market and relational environment may see fewer risks in the environment, since the behavior of the other party is more predictable to partner firms. Therefore, their perceived importance of trusting is low, indicating that their trusting actions could be motivated by other factors such as strategic requirements, which is an example of firms’ behavioral readiness for trusting.
A firm’s behavioral readiness indicates the firm’s attitude towards acting trustingly, based on the evaluation of potential consequences of such an act. It is related to an investigation of the compatibility between possible outcomes of trusting actions and the desired ones according to corporate development strategy. This addresses the call by Hedstrom (2005) that to explain actions in intentional terms means that the explanation should be provided by reference to the future state the action is intended to bring about.
But the behavioral readiness can also be linked to a firm’s analysis of the feasibility of doing so. It refers to an examination of the availability of resources needed to conduct trusting actions. A firm with high perceived importance of trusting but without sufficient support and capability to make it happen is not likely to take a trusting action in the end. This understanding of the behavioral readiness for trusting is endorsed by the concept of self-efficacy beliefs in social cognition theory. Defined by Bandura (1997), self-efficacy beliefs are “beliefs in one’s capabilities to organize and execute the courses of action required to produce given attainments” (p3). Such beliefs affect people’s level of motivation for certain actions, thus, influencing the choices people make and the courses of actions they pursue, such as trusting actions.
A firm’s perceived importance of trusting and behavioral readiness to act trustingly are the firm’s specific responses to given external, internal and relational environments. Environmental factors have indirect effects on a firm’s intention to behave trustingly through its effects on the major antecedents to the intention. A firm with high perceived importance of trusting and a high level of behavioral readiness will have stronger intentions to take trusting actions, increasing the likelihood of actual behaviors in the end. On the other hand, a firm having low perceived importance of trusting and low levels of behavioral readiness will have weaker intention to act trustingly and a lower
256 likelihood of actual trusting behaviors. However, it would be more ambiguous to determine how strong or weak a firm’s intention is to act trustingly when it has high perceived importance of trusting but low level of behavioral readiness, or vice versa. The outcome is largely determined by the relative effects of the two antecedents, i.e. the
!1 !2 in the equation, which vary in different environments.
The theory of reasoned action (TRA) provides a useful lens to better understand how firms develop intentions that lead to the occurrence of trusting actions. However, the heart of the TRA is still about relationships between variables rather than processes except in the sense of the combining of different factors as in the + and × signs. These signs are where mechanisms come in, such as learning, evaluating, coping and sensemaking, which operate to bring about the emergence and changes of beliefs that affect the breeding of intentions, thus, integrating different elements of the TRA. A summary of mechanisms identified in this research will be presented in section 10.3.
In summary, the dynamics of trust in business relationships is reflected in changes in a firm’s trusting attitudes and trusting actions. Firms’ beliefs in the capability, benevolence and integrity of their partner firms lead to the development of a trusting attitude. The existence of trusting attitudes is essential to the occurrence of trusting actions but not a guarantee. But the actual trusting behaviors are also predicted by trusting firms’ intentions, which are determined by their perceived importance of trusting and behavioral readiness to do so in given environments. The differentiation of trusting attitude and trusting action as two key components of the dynamics of trust helps to explain the lack of empirical support for propositions suggesting the role of a firm’s intentions and goals in developing trust. The conceptual model proposed in Chapter 4 treats trust only as an attitude developed between focal firms. But the cases have led to the identification of two conceptually distinct aspects of trust, trusting attitudes and trusting actions.
Being a psychological condition responding to actions and interactions in the relationship, trust as an attitude is less likely to be impacted by a firm’s relational objectives and goals, which are firms’ strategic decisions made in particular circumstances. However, the intentions and goals for the relationship can encourage or
257 discourage a firm to act trustingly as part of the efforts to realize these objectives, thus, impacting the intention of the firm to proceed with the trusting action.
10.2 A model of the dynamics of trust in business relationships The discussion in the previous section can be summarized in a model of the dynamics of trust as shown in Figure 10.1. The model is a revised version of the conceptual model introduced in Chapter 4. It follows the general flow of relationship evolution in the conceptual model bearing upon the IMP perspective of interactions as the core process in business relationships. The revised model highlights the underlying processes through which the dynamics of trust operates in business relationships. The model integrates contexts, processes and outcomes to provide a basis for the interaction between levels of trust, trusting actions and relationship evolution that goes on continuously. Trust influences relationship evolution through its effects on actions and interactions. At the same time, the process of learning and adapting based on the experience and outcomes of interactions produce feedback effects on the nature and degree of trust and affect relation structure and processes generally.
258 Figure 10.1 Model of dynamics of trust in business relationships
External Environment (e.g. market, competition) Context
Initial Resources ResourcesResources Internal Environment (e.g. structure, strategy)
Initial BeliefsBeliefs Relational Environment Beliefs (e.g. power, personal relations)
Perceived importance Behavioral readiness of trusting to act trustingly
Initial Trusting trusting attitudes Trusting actions attitudes Process
Interaction Experiential learning (width and depth) and adapting
Performance and Relationship developmental status Outcome satisfaction (e.g., consolidative, transformative)
259 Trust dynamics occurs in two ways, namely, changes in the condition of trust in a partner firm and trusting actions based on the condition of trust. The perceptions of the degree of trust the partner firm has in your firm could also be added but would unnecessarily complicate the model. Conditions of trust include the nature and degree of trust, resulting from actions and interactions taking place in a relationship. These conditions are not static but are continually being produced, reproduced or changed as a result of ongoing experience. On the other hand, trusting actions refer to firms’ undertaking risky courses of action in the confident expectation that the partner firm will act competently and benevolently (Barber 1983). Attitudes are evaluative and/or affective responses to objects (Bagozzi, Gurhan-Canli and Priester 2002). Therefore, trust, as an attitude, is a mix of emotional feelings and rational thinking. It is not forced but develops naturally out of the social and business interactions throughout relationship development, thus, changes in the condition of trust cannot be directly controlled by cooperating firms. On the other hand, trusting actions are firms’ strategic responses to specific environmental situations in which they exist and cooperate. They are intentional behaviors based on deliberate decisions made in particular contexts and hence, are controllable by firms.
Broadly, two phases of trust development and activation are reflected in the model, i.e. the initial condition and activation of trust at the inception of a business relationship and the ongoing process of trust development and activation in conjunction with relationship development. In general, changes in the conditions of trust are driven by the changes in the resources and beliefs of a focal firm and its partners resulting from the outcomes and experience of interactions over time, while the activation of trust, i.e. actions relying on trust, is based in part on the trust existing at a particular time and firms’ intentions to act, which are determined by their perceived importance of relying on trust and the behavioral readiness to do so. These in turn stem from other processes and mechanisms including general ongoing experiences of the firm and its goal setting processes, which are not depicted in the model.
History matters (North 1990) particularly in creating the initial conditions of trust between firms who are about to collaborate for the first time. The shadow of the past is reflected in existing resources firms possess and the perceptions of each other regarding capability, benevolence and integrity, based on their track records in the industry. On
260 the basis of these, initial calculative and affective trust is built. A firm’s own resources affect its perceptions of itself and those of a potential partner since the knowledge it has helps the firm to determine what it wants from the partner, thus facilitating the evaluation of the competency and capability of the partner firm. When a relationship starts to unfold over time, on-going events in the relationship have a greater effect on the development of trust, while the effects of past experience decline in importance and may be revised and updated. Partner firms learn about each other through ongoing actions and interactions, and adapt to their resources and beliefs. The outcomes of cooperation, as compared to partner firms’ expectations and alternatives, affect how satisfied firms are with the partner and the relationship. The assessment of performance will confirm or lead to adaptation of firms’ pre-existing beliefs, thus, impacting the maintenance or changes in the degree and type of trust.
While trust, as a psychological response, develops in a non-conscious and automatic way, trusting action is a purposeful endeavour stemming from a more conscious and deliberate decision-making process. The existence of trust is an essential prerequisite for trusting actions, yet not a guarantee. The actual occurrence of trusting actions stems from a firm’s intention to act in this way. For instance, though predictability based on knowledge obtained of each other contributes to the building of trust between partner firms (Huemer 2004b; Shapiro, Sheppard and Cheraskin 1992), unpredictability breeds perceptions of risks, which encourage the occurrence of trusting actions in that firms may rely on trust to cope with the uncertainty. Successful trusting actions, in turn, will breed trusting attitudes.
In general, a firm’s intentions to take trusting actions are driven by its perceived importance of trusting and behavioral readiness to do so. The perception and behavioral readiness are subject to the effects of external, internal and relational environments, which vary as relationships evolve.
The external environment refers to the business market where partner firms operate, including its competitiveness, stability or turbulence. A firm’s knowledge and perceptions of the market in which it operates include perceived levels of risk involved. A more risky business environment may motivate firms to rely on their existing trust in potential partners to establish and continue a cooperative relationship. The external
261 environment also involves a network of firms offering alternative resources that focal firms need and seek. The availability of alternatives allows focal firms to evaluate and compare, which ultimately affects their propensity to take trusting actions towards certain partner firms. On the other hand, when a firm possesses exclusive resources needed by its partner firm, the partner firm will have strong incentives to proceed with trusting actions, such as starting a new business relationship, to access into those resources.
The internal environment refers to the internal organizational environment of the focal firms, which includes their relative sizes, organizational and personnel structures, corporate visions and cultures, as well as strategies and objectives. These environmental dimensions are themselves the product of history and can change, but at any given time they indicate how independently and autonomously a firm can operate and hence how necessary it is for a firm to act trustingly to a partner firm and how ready it is to take such actions. According to Hakansson (1982), the size of partner firms is a key factor that gives the firms a basic position from which to interact. A small firm such as Xtar Sports in the main case, when it is first established, would be more keen in seeking opportunities to cooperate with other firms for complimentary resources to enhance its own competitiveness. Such perceptions of the likely consequences of trusting add to the firm’s behavioral intention to take trusting actions such as building or maintaining a business relationship.
The relational environment encompasses such dimensions as the power structure/interdependence and the social bonds between partner firms. The relational environment encourages or depresses the conduct of trusting actions. A relationship with a power imbalance between partner firms may require the weaker firm to seek psychological protection from the trust placed in the partner in order to leverage the power imbalance (Narayandas and Rangan 2004) or to check opportunism (Hakansson and Sharma 1996). In an arm’s length relationship, fewer incentives are offered for firms to take trusting actions as efforts to move the relationship forward. This is because firms in such relationships are more likely to follow simple routines and legal contracts in their interactions and relationship operation. As noted by Boon and Holmes (1991), a relationship with high level of interdependence will see its partner firms more inclined to rely on trust and to reciprocate trusting acts as a way to cope with potential risks,
262 such as the ambiguity about the future, when extending the scope of interaction and cooperation into new areas.
Though the environment that affects the formation of a firm’s intention to take trusting actions in business relationships can be categorized into external, internal and relational dimensions, they are not isolated from each other but interconnected in that changes in one part of the environment can trigger subsequent changes in another. For example, the increasing competitiveness in a business market would motivate a firm to adjust its strategies to address the market challenges, which would lead to changes in its perception of the value of its partner firm and the relationship with it, implying altered relationship objectives and power structure. The relational environment therefore changes.
As noted already, trusting actions will not take place without the existence of trust. But trusting actions produce feedback effects on trust development as well. Trusting actions impact the depth and scope of interactions in the relationship, throughout which firms learn and adapt themselves. The outcomes of learning and adaptation are reflected in the changes in resources and the beliefs firms hold of themselves and their partners, which generate further changes on the structure and degree of trust between each other. This ongoing cyclical process echoes the picture described by Boersma, Buckley and Ghauri (2003) that the dynamics of trust is a process involving a sequence of phases in which the outcome of one phase constitutes the input of the next.
When firms rely on their trust in partner firms to manage their interactions in business relationships, the width and depth of those interactions affect how the relationship evolves over time. The nature of the relationship resulting becomes the new relational environment conditions, which lead to different perceptions of the importance of acting trustingly and behavioral readiness to do so, both of which impact partner firms’ intentions to undertake trusting actions. The outcomes of interactions lead to firms’ adjusting their intentions and goals for the relationship, as well as their perceptions of it. This indicates an alteration in the internal environment which gives firms stronger or weaker stimuli to take trusting actions. The picture emerges of nested system of interconnected cycles of acting, interacting, learning, adapting taking place in and between firms and the environment. Each is subject to its own rhythms, processes and
263 mechanisms. Out of this a relationship emerges and changes over time together with trusting attitudes and trusting actions.
The model of the dynamics of trust in business relationships illustrates the co-existence and connections between trusting attitudes and trusting action, which are key components of trust dynamics, as well as the paths along which they change and evolve. But underlying the lines in the model that connect different processes are various mechanisms that trigger the impact of one element on another. These mechanisms have been identified in the analysis of the main case and are summarized in the following section.
10.3 Mechanisms underlying the dynamics of trust in business relationships As discussed in Chapter 3, mechanisms are underlying processes that account for causal relationships among variables (Campbell 2005). They are composed of actors and activities involved in processes that are capable of causing or preventing changes in a system (Bunge 1997). Mechanisms reflect a particular progression of events and their conjuction with other events, therefore, the description of mechanisms should be a statement of connections, contexts and timing between and among events (Poole, Van de Ven, Dooley et al. 2000).
Given the distinction of trusting attitudes and trusting actions in the dynamics of trust, different sets of mechanisms are identified in the analysis of the main case, with some in common. Trusting attitudes develop as firms constantly adapt their resources and beliefs as a result of their learning about how partner firms perform in interactions and their assessment of what is achieved in interactions in comparison to expectations and alternatives. The initial trusting attitude is or is not confirmed in real experiences before it is able to develop further. However, as a relationship matures, trusting attitudes could reach a stable point in that its nature and strength are unchanging over time. This does not mean the termination of the dynamic processes of firms’ learning and assessing outcomes but that the patterns and outcomes these processes produce and reproduce become regular and constant, hence, producing a dynamic balance in trust between partner firms. Trusting attitudes can be preserved so long as the cognitive consistency (Lord and Maher 1993) is achieved and maintained by focal firms along with their
264 ongoing interactions in the relationship. Ten mechanisms have been identified in the analysis of the main case to explain the process of trust development, which include the historical learning mechanism, formative evaluating mechanism, stereotyping mechanism, exchange mechanism, experiential learning mechanism, adapting mechanism, comparative evaluating mechanism, transferring mechanism, affective mechanism and institutionalizing mechanism.
Another six mechanisms are detected that influence the emergence of trusting actions through their impact on the formation of focal firms’ intention to take trusting actions. They are evaluating mechanism, coping mechanism, stereotyping mechanism, self- efficacy mechanism, social bonding mechanism and reciprocity mechanism. The identification of these mechanisms reveals the different roles trust plays in relationship evolution. Trusting ends when predictability starts (Lewicki and Bunker 1996). This indicates that firms are more likely to act on the existing trust in their partner firms in an environment with risks and uncertainty. In business relationships, a firm’s perceived risks stem from uncertainty in the environment and from the partner firm, i.e. environmental and behavioral uncertainties (Weed and Mitchell 1980). Behavioral uncertainty relates to the unpredictable behaviors of the partner firm. Environmental uncertainty stems from the competitiveness and turbulence of the external market situation. It may also relate to the complexities in the internal organizational environment caused by changes in organizational and personnel structures. The effects of instability in the external and internal environments can ripple over to the relational environment, thereby, increasing the level of uncertainty (Aldrich 2001).
A highly unpredictable environment leads to a firm’s higher perceived importance of relying on trust, and the firm’s trusting actions may follow, if it is encouraged by environmental conditions such as compatible corporate strategies and sufficient resources. These dynamics indicate that trust could play a more active role when a business relationship is thrown into a changing environment that has increased levels of uncertainty and requires focal firms to reassess their strategies and objectives for the relationship. Therefore, trust could be activated in specific occasions when a firm attempts to initiate a new relationship, extend the scope of a relationship into new areas of cooperation, and maintain the relationship when it is jeopardized by environmental instability, such as organizational and personnel restructuring, as seen in the main case.
265 By the same token, firms do not consider trust actively when the relationship environment is stable with less uncertainty, such as when firms are taking conservative steps to get familiar with each other in contract-specific interactions and when firms are content with how the relationship is going. Trust exists unnoticed until firms need to conduct activities “in a sphere of considerable haziness” (Parkhe 1993).
The definitions of these mechanisms are summarized in Tables 10.1 and 10.2.
266 Table 10.1 Summary of key mechanisms for trust development
Key Mechanism Explanation Contextual Factors to Consider Empirical Example Historical learning Historical learning mechanism is Historical learning mechanism functions Xtar Sports is a newly-established company when it is mechanism referring to the process of how more saliently in the process of building looking for a major sponsor for the newly-acquired firms’ prior histories of initial trust in a new business ATP tennis event. Given its lack of reputation and cooperating with other partner relationship. experience in sports industry, Xtar Sports builds its firms determine their values for confidence in HBB as a capable partner largely based potential partner firms as well as on HBB’s financial power, brand reputation and rich how firms evaluate their potential experience in sports sponsorship, all of which are partners using second-hand essential resources to the success of the event yet could knowledge of their resources and not be self-generated by Xtar Sports. The attractiveness reputation. of these resources of HBB constructs the major ground on which Xtar Sports builds its initial calculative trust in HBB. Formative evaluating Formative evaluating mechanism Formative evaluating mechanism can be In the case of XtarSports-HBB relationship, the global mechanism refers to the process whereby triggered by historical learning reputation of HBB as an active and popular sports firms rationally and consciously mechanism. It operates more saliently at sponsor, especially in tennis, has helped to foster Xtar combine their knowledge the inception of a business relationship Sports’s initial trust in HBB as a reliable partner, acquired in the past experience to when partner firms do not have despite a lack of any experience of formal cooperation shape an initial impression of experience of cooperation or firsthand between them. partner firms, which leads to the knowledge to rely on. initial condition of trust in a new business relationship. Stereotyping mechanism Stereotyping mechanism means Stereotyping mechanism can be activated The American background of Mark Lueno and Cleve that firms are placed into a by historical learning mechanism. It Steward helped enormously in bridging the cultural general category, for example, functions more saliently at the inception gap with the senior management team in HBB China. based on their nationality, of a business relationship, when partner The cultural congruence indicates agreeing value ethnicity and culture. When a firm firms do not have experience of systems that promote the cultivation of mutual matches a positive stereotype held cooperation or firsthand knowledge to affection between individuals as well as the initial by its partner firm, the partner rely on. affective trust placed in firms. firm will quickly form positive beliefs by generalizing from the favorable category into which the trusted firm is placed, which leads to the building and development
267 Key Mechanism Explanation Contextual Factors to Consider Empirical Example of trust. Stereotyping mechanisms may operate as a process of unconscious judgment based on feelings and general biases. Exchange mechanism Exchange mechanism refers to a Exchange mechanism is a fundamental The ongoing interactions in the learning phase of the continuous process of interactions mechanism that permeates all phases of XtarSports-HBB relationship provide the firms with taking place in service exchange, the relationship yet produces different opportunities to acquire firsthand knowledge of their information exchange, financial outputs given particular spatiotemporal partners, such as capability and competitiveness, exchange and social exchange, contexts of operation. compatibility of corporate cultures, as well as the which trigger other mechanisms existence or any lack of friendliness and benevolence. that affect the perception and The acquired knowledge enables the firms to confirm behaviors of individuals and or not their pre-experiential hopes of their partners, firms. which strengthen or weaken the initial trust constructed at the inception of the relationship. This is an example of how exchange mechanisms trigger experiential learning mechanisms in a business relationship to produce changes in beliefs that, in turn, impact the overall condition of trust. Experiential learning Experiential learning mechanism When a business relationship matures, The fact that Xtar Sports has improved the quality of mechanism refers to the process of how firms experiential learning mechanism the tennis event and made it a bigger success convinces update their beliefs of their functions more saliently in some HBB of its professionalism and capability, which partners through hands-on situations such as emergent and strengthens HBB’s calculative trust in Xtar Sports. On learning in the relationship, which unexpected circumstances and in extra- the other hand, Xtar Sports’s agreement to do extra to leads to changes in trusting contractual settings where firms perform help out when HBB’s sales are dropping makes HBB attitudes. extra-role behaviors. believe in Xtar Sports’s full commitment to the relationship as well as its caring and concern towards
268 Key Mechanism Explanation Contextual Factors to Consider Empirical Example The operation of experiential learning the partner. The learning about Xtar Sports in these mechanism is moderated by the effects aspects results in enhanced affective trust of HBB in of spatial contexts of interactions: Xtar Sports. Learning in the contractual context leads to adaptation of a firm’s beliefs in its partner’s competence, which ultimately leads to enhancement or reduction of the calculative trust of the partner firm. Learning in the extra- contractual context leads to adaptation of a firm’s beliefs in its partner’s benevolence and integrity, which ultimately leads to enhancement or reduction of affective trust of the partner firm. Adapting mechanism Adapting mechanism refers to the Adapting mechanism does not function In the early years of cooperation, HBB perceives Xtar process whereby firms make alone. It is stimulated by other Sports as an expert in the tennis industry only. adjustment to their resources, mechanisms, such as experiential However, when Xtar Sports successfully stages DJ beliefs and behaviors based on learning and evaluation mechanisms to Tiesto’s concert and appropriately manages the crisis what they have learned in the produce observable changes in the level of the Rolling Stones concert, HBB extends its relationship, which in turn revise of trust. confidence in Xtar Sports’ capability of managing the conditions of trust, being events in different industries. This adjusted belief enhanced or weakened. solidifies and broadens the existing trust in Xtar Sports.
269 Key Mechanism Explanation Contextual Factors to Consider Empirical Example When operating in combination When HBB first starts working with Xtar Sports, its with evaluation mechanism, the lack of substantial experience in cooperating with a operation of adapting mechanism Chinese firm leaves the firm at a loss in terms of what extends to the process of how to expect from the partner and the relationship. So its revised conditions of trust initial goals are very general and ambiguous. However, generate feedback effects on after years of cooperation, HBB is clear what Xtar shaping expectations that in turn Sports can do and what the relationship can achieve. produce impact on trust Therefore, its expectation becomes explicit and precise development through their such as a certain number of hospitality events to be influence on firms’ satisfaction held during the tennis tournament and specific levels of with the relationship outcome. media exposure.
Comparative evaluating The comparative evaluating Comparative evaluating mechanism is The initial expectation that HBB has for the mechanism mechanism describes the triggered by experiential learning relationship is to have the tennis event successfully evaluating process by which mechanism. It functions together with staged and improved gradually for its own branding behaviors and outcomes are adapting mechanism to produce changes purposes. When Xtar Sports fulfills these goals, it compared to expectations and in the level of trust. earns strengthened trust placed by HBB. performances of other Xtar Sports’ working experience with an increasing relationships, the result of which number of domestic clients allows it to compare the leads to adaptation of firms’ professionalism and marketing savviness of these cognitive and affective beliefs in sponsors with HBB China, which results in Xtar partners, thus, impacting the level Sports’s greater respect for HBB China for its of trust. exceptional proficiency in event marketing and its increased confidence in the relationship with HBB China.
270 Key Mechanism Explanation Contextual Factors to Consider Empirical Example The operation of expectation-based When Xtar Sports fully delivers its promises and the comparative evaluating mechanism is HBB Open tennis event produces positive results over influenced by the effects of the first few years of cooperation, HBB gradually spatiotemporal contexts. When the builds up its confidence in Xtar Sports’s competence as relationship matures and focal firms a professional event management company, thus, repeatedly fulfil contractual tasks, this strengthening its trust in its partner. However, as the evaluating mechanism is more salient in relationship matures and Xtar Sports repeatedly extra-contractual context where satisfies HBB with its performance in event expectations are exceeded by firms’ management and client service, these in-role behaviors, extra-role behaviors. though successful, become less able to boost HBB’s trust in Xtar Sports. Instead, the trust is fortified more effectively by the favorable performance of Xtar Sports in the extra-contractual venue, where Xtar Sports provides more value to HBB than expected. This includes doing more event marketing for HBB to improve its dropping sales, successfully operating DJ Tiesto’s concert and paying for the European player for the HBB Open out of its own pocket. Transferring mechanism Transferring mechanism refers to Transferring mechanism operates in The HBB China managers are not interested in the process whereby a firm’s combination of experiential learning developing any personal relationships with their well-established calculative trust mechanism to produce changes in counterparts in Xtar Sports until they are fully in its partner firm fosters its interpersonal trust. convinced of their capability and competence as interest in individuals in the proved in business cooperation. partner firm, thus, promoting social interactions that help the building of affective trust. When the basis for calculative trust disappears, affective trust will be threatened as well.
271 Key Mechanism Explanation Contextual Factors to Consider Empirical Example Affective mechanism Affective mechanism describes a Affective mechanism operates in When HBB China decides to step down in the process whereby an individual’s combination with experiential learning sponsorship program and becomes less active in affective feelings towards another mechanism functioning in social settings cooperating with Xtar Sports in event marketing in the individual or organization and evaluating mechanism. This final phase of the relationship, Xtar Sports does not influence his/her judgment of the mechanism is more effective to sustain shake its trust that on HBB China. The faith is built on other’s behaviors, which, in turn, trust when partner firms experience major the calculative belief in HBB China, but a more impacts other cognitive beliefs in changes in the relationship. important and solid foundation is the strong affective the other that consequently attachment developed between individuals throughout affects the level of trust. the years of cooperation.
Institutionalizing mechanism Institutionalizing mechanism Institutionalizing mechanism is more As Xtar Sports and HBB continuously behave refers to the process whereby likely to function when relationships get professionally and considerately to produce mutual interactions produce and mature with standard operating benefits in the relationship, their trust in each other reproduce regular patterns of procedures established. does not keep accumulating but remains firm and experiences and outcomes that stable. lead to no new knowledge creation, no adaptation in firms’ resources and beliefs and no deliberate evaluation of partner firms’ performance, which, therefore, maintains the overall level of trust at a stable point.
272 Table 10.2 Summary of key mechanisms for trust activation
Key Mechanism Explanation Contextual Factors to Consider Empirical Example Evaluating mechanism Evaluating mechanism operates to impact Evaluating mechanism could operate One of the major reasons that HBB China the formation of a firm’s intentions of throughout the relationship evolution, agrees to start a formal relationship with Xtar acting trustingly through a) processes however, its role could be especially obvious Sports is its exclusive hosting right of the whereby firms evaluate their corporate at the inception of a new relationship when annual ATP tennis event. Being a sponsor to goals and compare them to the potential firms do not have hands-on experience to this major event matches HBB China’s relational benefits to determine how help with the decision making but only few strategy of event marketing to boost its brand compatible they are, which influences their criteria to rely on. in China. motivation and readiness to proceed with trusting actions, hence, affecting the formation of firms’ intention of acting; b) processes whereby firms evaluate resources needed to act trustingly and compare them to the resources available in the firms to determine how ready they are to proceed with trusting actions. Coping mechanism Coping mechanism refers to the process of Coping mechanism will be triggered by any For HBB China, doing business in China is how a firm evaluates the level of risk and mechanism that causes changes in the filled with enormous risks and uncertainty, uncertainty in an environment that affects external, internal and relational due to the unique business environment in the its perception of the importance of relying environments where cooperating firms exist market. The level of risks could be heightened on trust to cope with the environment, and cooperate, resulting in different levels of when cooperating with a small firm like Xtar which influences its intention of taking risks and uncertainty in the environment. Sports for the first time. Since the relationship trusting actions and consequently, the with Xtar Sports is of critical importance to actual occurrence of such actions. HBB China to achieve its corporate goals, HBB China is motivated to actively consider and rely on its trust on Xtar Sports based on the capability of its key staff and close ties with the local government. This helps to reduce the perceived risks by HBB China.
Stereotyping mechanism Stereotyping mechanism refers to the Stereotyping mechanism functions during HBB executives are attracted to Mark and process whereby individuals tend to be the course of partner selection when firms Cleve because they are perceived as similar to attracted by other individuals from the rely more on the first sight to choose their them in terms of cultural stereotypes. As it partner firm who have geographic, social business mates. turned out, this personal emotional attraction
273 and cultural proximity. The developed is one of the major reasons why HBB China personal emotional attraction, in turn, agreed to cooperate with Xtar Sports, makes firms more inclined to behave indicating the impact of the personal attraction trustingly in the business relationship. on enhancing the behavioral intention to take trusting actions. Self-efficacy mechanism Self-efficacy mechanism refers to the N/A HBB China’s decision of relationship process whereby firms rely on their continuation is largely based on its prior perceived interpretation of the experiences with the relationship. The performance of their partners and the perception of the relationship as pleasant and relationship to determine their intention to successful gave HBB China more confidence proceed with acting trustingly. in achieving its relational goals, thus, enhancing its intention to stay in the relationship. Social bonding Social bonding mechanism refers to the Social bonding mechanism operates in The close personal ties between Xtar Sports mechanism process whereby the existence of personal business relationships that involve personal and HBB China have encouraged their affect motivates individuals to display relationships where individuals develop managers to be frank to each other about the their emotion in others and make them personal affect towards each other. difficulties they are faced with and ask for inclined to cooperate with others, thus, help, such as when Xtar Sports lacks enough building up their behavioral readiness that sponsorship for its first women’s tennis leads to intentions to conduct trusting tournament in Shanghai and when HBB China actions in the relationship when necessary experiences devastating drops in its sales in and possible. China. Reciprocity mechanism Reciprocity mechanism refers to the In certain circumstances, the operation of HBB approaches Xtar Sports with the project process of how a firm’s trusting/distrusting reciprocity mechanism could be moderated of DJ Tiesto’s concert when it cannot get the behavior triggers an increase/decrease of by the operation of evaluating mechanism. permission from the government for the event. benevolence trust that the trustee/distrustee Xtar Sports is touched by the trust of HBB places in the trustor, which eventually places in it and decides to trust back by affects the chances of the agreeing to cooperate on the project, despite trustee/distrustee’s undertaking of trusting all the difficulties including remote location actions and time restriction.
274 Though the mechanisms identified to explain the process of trust development and activation are named differently and refer to specific operational processes, they can be generalized into certain types, given their generic characteristics including specialized function, input conditions, operations on inputs, as well as domains of outcomes (Barrett 2008).
A trusting attitude is based on beliefs in a trustee’s capability, benevolence and integrity. It develops when partner firms go through a mental accounting process (Kahnenman and Tversky 1984) whereby they learn, interpret and evaluate each other. This indicates that mechanisms explaining the development of trusting attitudes between focal firms in a business relationship operate through alterations of individual and collective perceptions, thus, being cognitive mechanisms (McAdam, Tarrow and Tilly 2001). Cognition is the act of knowing reflecting how people think, perceive, remember and learn, in particular, it focuses on how people acquire, process and store information (Newell 1990). Guided by this understanding, cognitive mechanisms explain how changes/non-changes in perceptions and cognitions occur and how they play a causal role in shaping attitudes as a result of information acquisition and processing that result from the operation of these mechanisms. The learning mechanism, adapting mechanism, stereotyping mechanism, evaluating mechanism, transferring mechanism, affective mechanism and institutionalizing mechanism, are examples of cognitive mechanisms that drive the evolution of trusting attitudes developed between focal firms in a business relationship. These mechanisms are concerned with the intermediate processes producing cognitive changes and revised conditions, which are their outcomes.
Among the above-mentioned mechanisms for trust development, affective mechanism is distinguished from the others in terms of its input conditions and operations on inputs. Affective mechanisms refer to processes whereby an individual’s affective feelings towards another individual or organization influence his/her interpretation and judgment of the other’s behaviors, which, in turn, impacts other cognitive beliefs in the other that consequently affects the conditions of trust. This definition indicates the existence of emotional feelings in the input conditions of the mechanism and the impact of emotion on how information is analyzed and recoded that leads to cognitive changes. While the mind is conceived of as a structural system for handling information (Buss 2004), it is a dynamic information-processing system whose mental operations can expand beyond
275 high-level concepts such as reasoning (Neisser 1967). We are far less rational than we think we are, due to the “irrational” part of our brain that gathers and processes information without us being aware of it (Lehrer 2009). This implies that in addition to reasoning, emotion is another path leading to the shaping and adjustment of cognition and perception. The affective mechanism is in nature an unconscious emotion-based cognitive mechanism, while the others identified in the case are conscious ration-based cognitive mechanisms.
The exchange mechanism is another mechanism identified in the process of trust development, referring to processes of interactions between focal firms. Interacting is a basic activity taking place in a business relationship during and after which other activities such as learning, adapting and evaluating can be conducted by partner firms. Interaction itself does not directly generate cognitive changes that lead to altered conditions of trust firms place in each other in a business relationship, instead, it operates to trigger other mechanisms to produce changes in trust such as learning and evaluating. Therefore, exchange is a fundamental mechanism through which cognitive mechanisms can be activated in business relationships. The outcome of cognitive mechanisms, in turn, produces feedback effects on the way an exchange mechanism functions.
Figure 10.2 illustrates the hierarchy of mechanisms involved in trust development as well as their interconnections. Mechanisms seldom operate on their own but typically concatenate with other mechanisms into broader processes (Gambetta 1998). As explained by Craver (2001), mechanism X can be said to be at a lower level than mechanism Y if X is one of the mechanisms involved in bringing about the type of Y- related outcome in consideration. For example, the adapting mechanism is a higher- level mechanism to experiential learning and evaluating mechanisms, enacted when triggered by them. As a relationship unfolds, personal relationships may develop as an outcome condition of the experiential learning mechanism especially in social settings. This will enact affective mechanisms, which brings the actors involved closer together and facilitates the maintenance of trust.
In brief, Figure 10.2 indicates that mechanisms do not exist and operate at the same level but in a nested hierarchy. Conditions of trust are the result of several different
276 mechanisms operating in sequence and in parallel (Gambetta 1998). Mechanisms are enacted when triggered, i.e. the relation between mechanisms and their effects is not determined but contingent (Danermark, Ekstrom, Jakobsen et al. 1997). Mechanisms may not be in operation at a particular time or place because they are not triggered.
277 Figure 10.2 Summary of key mechanisms for trust development in a business relationship
278 While the development of trusting attitudes is mainly a cognitive process, the emergence of trusting actions is more complicated in that firms need to consider more than trust to determine the action. Campbell (2005) suggests a framing mechanism that affects how actors perceive their interests, identities and possibilities for change. According to him, frames are symbols and cognitive cues that cast issues in a particular light and suggest possible ways to respond to these issues. Therefore, frames mediate between opportunities and actions because they provide the means with which actors can interpret the opportunities and thus, decide how best to pursue their objectives (McAdam, McCarthy and Zald 1996). In light of this, mechanisms concerning the emergence of trusting actions in business relationships are, in general, framing mechanisms in that the explanation is based on processes showing the impact of a firm’s perceptions, interpretation and evaluation of opportunities on the building of its intention for trusting actions.
The six mechanisms identified in the main case represent a different basis on which firms’ perceptions, interpretation and evaluation of opportunities are carried out. Evaluating mechanisms are grounded in firms’ economic calculation of potential relational benefits that affect its inclination to take trusting actions in the relationship, a kind of conscious cognitive economic mechanism. Coping mechanisms and reciprocity mechanisms are psychological mechanisms dealing with firms’, or rather their managers’, psychological adaptation (Buss 2004) caused by the perception and evaluation of environments and interactions in the relationship. For example, via the coping mechanism, firms are more likely to rely on trust in their partner firms to achieve a sense of control of the environment they perceive to be risky and unpredictable. This indicates a high level of perceived importance of trust that leads to the firm’s intention to proceed with trusting actions. The self-efficacy mechanism centers on the impact of learning based on past experience on firms’ interpretation of the capabilities to take actions. It indicates the role of memory and consequent predispositions in influencing firms’ intention of taking future trusting actions. Hence, the self-efficacy mechanism is a cognitive mechanism. As argued earlier in this section, when the brain makes up its mind, information is passed along not always as a reasoned decision, but as emotion. Social bonding mechanisms and stereotyping mechanisms are the processes whereby the existence of personal affect and attraction motivates individuals to display their emotions towards others and makes them more inclined to
279 cooperate with these others. They reflect how the unconscious part in the brain works in the decision-making process. This is why social bonding mechanisms and stereotyping mechanisms are classified as emotional mechanisms.
The process of emergence of trusting actions is an example of decision-making processes, which have been studied widely by scientists including neurologists. The neural mechanisms underlying the decision-making processes are beyond the scope of this research but it is perhaps worth mentioning that research using sophisticated brain imaging technologies is beginning to examine such processes and linking them to psychological processes. I discuss this more in the final chapter where future research is suggested.
Figure 10.3 summarizes the characteristics of mechanisms identified that explain trusting actions. The shaded parts in the Figure are joint parts of mechanisms that concatenate to produce firms’ higher intentions for taking trusting actions in business relationships.
280 Figure 10.3 Summary of key mechanisms for trust activation
281 10.4 Conclusion The dynamics of trust takes place in both attitudinal and behavioral dimensions, i.e. trusting attitudes and trusting actions by each party. These are two conceptually distinct dimensions in the sense that they evolve and operate in distinct and unique manners. Building trusting attitudes is a costly and time-consuming process (Johanson and Vahlne 2009) generated by changes in resources and beliefs as the results of focal firms’ learning experience and assessment of the actions and interactions in comparison to expectations and alternatives. Ten cognitive mechanisms have been identified that drive changes in the trusting attitudes throughout the evolution of business relationships, namely, historical learning mechanism, formative evaluating mechanism, stereotyping mechanism, exchange mechanism, experiential learning mechanism, adapting mechanism, comparative evaluating mechanism, transferring mechanism, affective mechanism and institutionalizing mechanism. These mechanisms co-exist and are triggered by exchange mechanisms to function in different spatiotemporal contexts throughout relationship evolution. Some of them combine, operating in sequence or parallel, to produce the changes in trusting attitudes.
Though a certain condition of trust is a prerequisite to trusting actions, it doesn’t promise the actual trusting behaviors. By the same token, an absence of trusting actions does not necessarily indicate a lack of trust developed between partner firms. A trusting action, which is a behavioral expression of trusting attitudes, is an outcome of a heavily context-dependent sensemaking process, which determines the particular function of trusting attitudes at a certain point in a relationship’s history. The overall environment in which firms operate and collaborate shapes their intentions to act trustingly. This echoes the voice of Lewis and Weigert (1985) that “behavioral trust should be conceptualized as situationally activated cognitive and/or emotional trust” (p977). Specifically, a set of economic mechanisms (evaluating mechanism), cognitive mechanisms (self-efficacy mechanism), psychological mechanisms (coping mechanism and reciprocity mechanism) and emotional mechanisms (social bonding mechanism and stereotyping mechanism) are suggested, based primarily on the findings of the main case. These mechanisms show that a specific combination of desires, beliefs and action opportunities generates the occurrence of trusting actions via these mechanisms.
282 The experience and outcomes of trusting actions produce feedback effects on trust development, as well as the environment. This interplay among trust, trusting and the environment explains Sydow’s general argument that trust is both the medium and outcome of the interactive process in business relationships (Sydow 1998). The contingent dynamics of trust in business relationships implies emergent and unpredictable properties of trust, thus, denying the existence of deterministic laws to understand and explain the evolution of interfirm trust even though they are produced by common underlying mechanisms.
283 Chapter 11 Analysis and Discussion of Supplementary Case I
Chapters 11 and 12 report and discuss the findings of the supplementary cases selected for this study. Given the different industries and the nature of the focal firms as well as the content of cooperation, the relationships in these cases present a different context to study the dynamics of trust and driving causal mechanisms. The findings are compared to those of the main case. Such comparative analysis enables the researcher to test established mechanisms as well as to identify new ones. The aim of the comparative analysis is not to seek conformity among cases but to compare variances (Ragin 1997). The mechanisms identified in the main case are taken as an operational template to determine whether evidence for the operation of the same mechanisms in other relationships can be found. Similarities between findings enhance the explanatory account of the mechanisms identified in the main case, while differences are treated as significant parts in the research as well, which provide complementary answers to explain the dynamics of trust and lead to identification of new mechanisms involved in generating the same phenomenon.
In the case of complex processes, it is difficult to compare complete event sequences and structures as it could be misleading, especially when the goal of research is to build theories of generative mechanisms (Pajunen 2004). Given this, the analysis of the supplementary cases is focused on identifying and analyzing the key events related to changes in the conditions of trust and the occurrence of trusting actions. Special attention is paid to recognizing and diagnosing the spatiotemporal context in which the events took place as well as their connections to other events. The understanding of the location of these events helps to explain what caused them and what they caused (Abell 2001), thus, revealing processes whereby mechanisms operate.
This chapter describes the findings in a supplementary case of the relationship between Beta Electronic Corp. and Sigma Advertising Agency from 2000 to 2006. Beta Electronics Corp. (referred to as Beta hereafter) is a private-owned Taiwanese company. Its main business is to develop, produce and market electronic dictionaries in the mainland, China. Its minor product line includes digital cameras and MP3 players. Beta entered the Shanghai market in 1988 and later expanded to other provinces in China. Sigma Advertising Agency (referred to as Sigma hereafter), the partner firm of Beta, is
284 a local private-owned agency in Shanghai. It was established in 2000, with the main business in media planning and media buying. Its clients included Beta, Omron and other local brands.
The findings of this case will be presented in this way. Firstly, process of relationship initiation will be provided, together with discussion of initial building of trusting attitude and relevant trusting actions. In the second section, process of relationship development and maintenance is described, followed by discussion of development of trusting attitude and emergence of trusting actions. The chapter ends with a brief conclusion.
11.1 Relationship Initiation and the dynamics of trust 11.1.1 Relationship initiation In 2000, Beta planned to launch a new product and needed to invest more in advertising to support the launch. Therefore, it was searching for agencies for media buying. Sherry Zo, the Planning Manager of Beta at that time, was a former colleague and close friend of James Wong, who was the account manager in Sigma. Sherry appointed Sigma as one of the media buyers for Beta, though she knew very little about Sigma as a firm except that one of its partners used to work for a prestigious 4A advertising agency and that James Wong had a good reputation in the industry.
Sigma, which was newly established in 2000, needed new clients to survive in the competitive market. When it was asked by Beta to be its media buyer, it was attracted by the opportunity for two reasons. Firstly, Beta had a strong belief in the role of advertising for the success of its business. Normally, 10%-15% of its annual revenue would be earmarked as advertising budget. Given this, Beta could be a stable client and produce long-term profits. Secondly, the well-known brand of Beta in the market would help Sigma to build its own brand image and set up reputation in the industry. This would be of particular importance to Sigma in that its prestigious clients would help the firm to pitch more new clients in the future.
However, Sigma also had two major concerns that made it hesitate to accept the offer from Beta. Firstly, Taiwanese companies were known as difficult and demanding clients,
285 therefore, they could be very hard to service. Secondly, Taiwanese companies didn’t have a good reputation in the industry in terms of on-time payment. There were even many cases of bad debts caused by Taiwanese companies. This was really worrying to Sigma. Being a small agency, its business could be seriously affected if it had bad debts from its clients.
Because of the personal relationship with Sherry, James was frank with her about his concerns. In reply, Sherry shared with James some inside information of the situation of Beta as well as its operation. She also promised that Beta would never cause any bad debts. The conversation, especially the promise from Sherry, eased the concerns of Sigma and convinced James that Beta could be an acceptable client.
Beta and Sigma started cooperation on media buying in late 2000. At that time, the expectation of Sigma for the relationship was that Beta could be a long-term client, while for Beta, it expected Sigma to offer them good media prices and provide satisfactory client services.
11.1.2 Development of initial trust and underlying mechanisms The residues of the past working relationship between Sherry from Beta and James from Sigma remain in the form of personal relationships and knowledge, which was taken up to provide the foundation for the emergence of the relationship between Beta and Sigma. Social bonds became the main vehicle for the transfer of relationship energy (Havila and Wilkinson 2002) as well as a central element in the initial conditions of trust between the two partner firms.
Affective mechanisms are detected to function saliently at the beginning of the relationship to drive the initial level of trust placed on partner firms. The affective feelings developed between individuals have influenced their judgment of the other’s potential performance and behaviors, which, in turn, impacted the cognitive beliefs in the other that consequently affected the initial conditions of trust in the relationship. In the relationship, despite a lack of sufficient knowledge of Sigma in terms of its organization structure and main business, Sherry developed her belief in the competency of Sigma based on her confidence in and liking of James, thus, transferring her affective personal trust to calculative organizational trust. The personal affective
286 trust acts as a kind of multiplier or conduit for accepting info about the partner firm. On the other hand, the personal trust in Sherry has impacted how James interpreted the bad reputation of Taiwanese companies in terms of on-time payment, which consequently affected his beliefs in the financial capability and business professionalism of Beta. The existence of personal affection enhances the individuals’ disposition to be optimistic and positive in evaluating their counterparts as well as the organizations they work for (Zaheer, Lofstrom and George 2002).
Personal relationships between individuals from partner firms are a type of company resources. In this case, the fact that the personal affections between the key personnel from Beta and Sigma arise from the past relationships indicates the operation of an historical learning mechanism to shape the firms’ current situations. As argued earlier in this thesis, historical learning mechanism refers to how the effects of a firm’s learning, growing and accumulating processes in past experiences are filtered into what the firm possesses. It is an umbrella term for various mechanisms operating in a business relationship over time that drive changes in the firms’ resources and beliefs. In light of this, historical learning mechanisms, which produce the relationship energy of social bonds exported to the relationship between Beta and Sigma, triggered the operation of affective mechanisms at the beginning of the relationship to shape the initial conditions of trust between the focal firms.
Historical learning mechanisms also operated in another way at the inception of the relationship. Without a history of cooperation, Beta developed its belief in the capability of Sigma based on its observation and evaluation of the resources of Sigma, such as the track record and reputation of the key staff in Sigma. This is consistent to the other meaning of historical learning mechanism, as defined in Chapter 6, which refers to the processes of how firms depend on second-hand knowledge of partner firms’ resources to evaluate the value of partners and determine the perceived trustworthiness of them. This also reveals that operation of formative evaluating mechanism, triggered by historical learning mechanisms, which impact partner firms’ initial impression of each other at the inception of the relationship. The visible resources, such as company reputation and that of personnel in the company, play a critical role in attracting or not potential partners to a new business relationship.
287 Sigma’s perception of itself in terms of what it possessed and needed affected its appreciation of the brand power of Beta as a valuable complementary resource which helped to build the initial trust in the partner firm. However, at the same time, its perception of Beta was also affected by Sigma’s prior knowledge of the negative reputation of Taiwanese companies that impaired the shaping of positive beliefs in Beta. This reveals the operation of stereotyping mechanism in driving initial conditions of trust in the relationship. The XtarSports-HBB relationship in the main case shows that firms are placed into a general category based on their nationality, ethnicity, culture, etc. When a firm matches a positive stereotype held by its partner firm, the partner firm will quickly form positive beliefs by generalizing from the favourable category into which the trusted firm is grouped, which promotes the building of initial trust. The findings in the Beta-Sigma relationship complement the explanation of stereotyping mechanisms by showing how such mechanisms may operate to produce negative impact on the building of trust. When a firm matches a negative stereotype held by its partner firm, the partner firm will develop negative perceptions by generalizing from the non-favourable category in which the firm is placed. This, in turn, would lead to the breeding of distrust.
In conclusion, the examination of the process of relationship initiation reveals a combination of different mechanisms operating together to produce the initial trust between Beta and Sigma. These mechanisms include a historical learning mechanism, a formative evaluating mechanism and a stereotyping mechanism, the three major mechanisms recognized at the inception of the relationship in the main case, as well as an affective mechanism. An affective mechanism is identified to operate in the main case during the relationship development process, but it is detected to function at the inception of the Beta-Sigma relationship in this case. It is triggered by historical learning mechanism that produces the relationship energy of personal affection from past relationships, based on which affective mechanisms can operate. In addition to being the propeller to the affective mechanism, the historical learning mechanism also impact the building of initial trust through its effects on the firms’ usage of second-hand knowledge to evaluate potential partners, which leads to the operation of formative evaluating mechanism in the relationship. Finally, a stereotyping mechanism operates as well. It doesn’t necessarily promote the development of trust, as shown in the main case, but acts to promote distrust as firms grouped into non-favourable categories are more likely to be perceived negatively by their partner firms.
288 11.1.3 Trusting actions and underlying mechanisms The key trusting action taken by Beta and Sigma at this phase was the agreement to cooperate. Given that the focal firms were faced with different external and internal environments at this point of time, the trusting action was taken by Beta and Sigma as the outcome of different sets of mechanisms.
The close personal relationship between Sherry and James has been a key driving force in initiating the cooperation between Beta and Sigma. The existence of personal affect motivated them to manifest their emotion and confidence in the other and made them inclined to be cooperative, thus, building up their behavioral readiness, leading to the construction of intentions to conduct trusting actions in the relationship, i.e. to agree to start a cooperative relationship between the firms. This reveals the operation of social bonding mechanism, the same as that identified in the main case, which hinges on the existence of personal relationships in business relationships. The operation of social bonding mechanism at this phase of the relationship provides more evidence to the point that personal trust leads to organizational commitment (Narayandas and Rangan 2004).
Sherry, the Planning Manager responsible for advertising for Beta, was the key decision maker to set up the cooperation with Sigma. While her motivation of working with Sigma was mainly based on her personal confidence and liking for James in Sigma, she has got another reason to do so. As a public secret in the advertising industry, advertising agencies pay a certain amount of commission to the key personnel in client firms. Despite being widely known and accepted in the industry, such a practice was still a sensitive issue to advertisers and was not encouraged. Given this, Sherry was more inclined to work with someone she knew and rely on the trust in that person to avoid the risk of being exposed. This presents another example of how coping mechanisms operates to impact the intention to take trusting actions in business relationships. The awareness of the risks and uncertainties in the environment affects the perceived importance of counting on trust to reduce the perceived risk, which influences the intention of proceeding with trusting actions.
Coping mechanisms functioned for Sigma as well in that James relied on the trust in Sherry to cope with the perceived risk of delayed payment and bad debts from Beta.
289 Given that Sigma was only a small advertising agency at the time with limited financial power, delayed payment and bad debts could seriously affect the operation of the agency, thus, being perceived as a real risk. But despite the concern about the billing problems, Sigma was quite attracted by the potential opportunity to work with Beta after the analysis of its own position. As a newly-established agency, it needed new clients to survive in the business, especially the powerful ones with well-known brands to help with the building of its own brand. The fact that Beta was a popular brand in the market and had a stable and impressive annual budget for advertising matched the desire of Beta, thus, enhancing its inclination and intention to start the relationship. This indicates the operation of an evaluating mechanism, a process whereby firms evaluate their corporate goals and compare them to the potential relational benefits to determine the compatibility, which influences their behavioral readiness to proceed with trusting actions, hence, affecting the formation of firms’ intentions of acting trustingly.
In conclusion, the relationship between Beta and Sigma represents a different initial condition from that in the main case, with the pre-existence of personal relationships between individuals working for the partner firms. This indicates the operation of emotional mechanisms such as a social bonding mechanism as one of the key forces motivating firms to take trusting actions, which, in this occasion, refer to the agreement on the first-time cooperation. Meanwhile, coping mechanisms and evaluating mechanisms are functioning as well, based on the focal firms’ perception and evaluation of their internal environments.
11.2 Relationship development and the dynamics of trust 11.2.1 Relationship development The narrative data collected for the Beta-Sigma relationship reveals three major phases in its history since it was established in 2000. These phases are identified based on the distinct scope and content of interaction taking place. The first year of the relationship is the trial period for Beta which took conservative steps to start the cooperation with small purchases only. The successful performance and professional client service provided by Sigma instilled more confidence in Beta and a critical event occurring in mid 2001 led to Sigma being authorized to do a lot more media buying for Beta. The intensified interaction provided opportunities for the partner firms to learn more about
290 each other and gain deepened knowledge not only in terms of professional capabilities but also organizational culture, operation manner and value system. This led to expanded cooperation in media buying to crisis management. Given these features of interaction, the period between mid 2001 and 2003 is termed an unfolding phase. After years of experience of cooperation, both firms became familiar with each other, knowing what each other wanted and was able to do in the relationship. Procedures and norms have been set up. Between 2004 and 2006, the cooperation became stable with standard orders regularly placed by Beta. Though smooth and successful, the relationship remained a buyer-seller relationship mainly driven by contract-specific interactions. Therefore, this phase is termed the stable phase. The three phases, put together, outline a rough history of the relationship, which reveals how trusting attitudes between Beta and Sigma have changed over time and how various trusting actions occurred or not, driven by underlying generative mechanisms. This is now discussed in detail in the following sections.
11.2.1.1 Trial phase (2000-mid 2001) The General Manager of Beta used to be a marketing executive. He had a strong belief in the pivotal role of marketing in overall business success. More than 10% of the annual sales revenue would be earmarked as advertising budget, which was a quite generous percentage according to the industry standard. Given the heavy advertising conducted every year, Beta was working with a few advertising agencies and Sigma was only one of them.
The relationship started with small-scale business when Beta asked Sigma to do media purchasing from certain local newspapers. The communication was usually conducted in an informal way, mostly via phone calls and emails, due to the personal relationship between Sherry and James. Beta was satisfied with the low prices quoted by Sigma, as well as its professional and comprehensive client services. Occasionally Beta would ask Sigma to provide extra services such as monitor data of various media ratings, which should have been purchased from marketing research firms and would have been quite expensive. Sigma used its network in the industry to obtain the information and offered it to Beta for free. As recalled by the senior manager in Sigma, there were two reasons that the firm agreed to do more. Firstly, Sherry and James were very close friends and it was hard for James to refuse the request from Beta. Secondly, Sigma believed that as a
291 small advertising agency, it could build up its competitive advantages by excelling in client services. Only by doing so could Sigma satisfy its clients and secure them for long-term cooperation.
The first year of cooperation gave both firms a better knowledge of each other. Beta realized the capability of Sigma, including its extensive networks in the industry and the quality of its client service. Knowing what Sigma was able to deliver has raised the expectation of Beta for future cooperation, especially that of Sherry. As for Sigma, it learned how demanding Beta could be and that it was seeking services in both contractual and extra-contractual contexts. The knowledge gained out of the learning in the trial phase of the relationship provided fertile ground for further development of the relationship in the unfolding phase.
11.2.1.2 Unfolding phase (mid 2001-2003) Though Beta placed its advertisements in many media, the lion’s share went to ABC Newspaper, a largely-circulated local newspaper in Shanghai. An exclusive media agency was appointed by Beta to be in charge of the media buying from ABC Newspaper. The cooperation with that agency went well until mid 2001, when the director of the agency was involved in a financial dispute and disappeared overnight. Given the importance of the newspaper, Beta immediately began to search for a new agency to take over the business. Sigma, as an existing partner to Beta, was one of the choices considered by Beta. It was finally selected to fill in the role for three reasons. Firstly, the personal relationship between Sherry and James gained Sigma some emotional credit that gave it an advantage over other competitor. Secondly, the performance of Sigma in the first year of cooperation was satisfactory to Beta, especially its capability of getting competitive prices from local media. Thirdly, at that time, Sigma was one of the authorized media agencies appointed by ABC Newspaper to buy from it. Besides, it had developed good and close relationship with the sales team of ABC Newspaper that would enable Sigma to get a better price. This was proved in the trial deals where Sigma offered great prices for advertising space in ABC Newspaper and fulfilled all the strict requests by Beta, such as requesting a specific page in the newspaper for advertisement placement. In the end, Sigma was appointed by Beta as its exclusive agency for media buying from ABC Newspaper. This event marked the expansion of the scope of cooperation and increased the importance of the
292 relationship to Beta. It also shows how a crisis event provides opportunities for rapid development of a business relationship.
In late 2001, Beta appointed a new Marketing Director, Christina Ho. With her appointment, Sherry, the Planning Manager, became her subordinate and had to report to Christina for approval of any marketing decisions. This change in the organizational structure did not cause direct impact on the relationship between Beta and Sigma, however, it woke up Sigma to the point that it should not solely rely on the personal relationship to sustain the business tie. Instead, it should expose itself more to the organization of Beta and try to set up its competitive image within the partner firm.
An opportunity arose in the end of 2001, when Christina, the new Marketing Director, decided to enhance the efficiency and quality of advertising campaign in Shanghai. She called for a contest among three media agencies to select the best as an authorized media agency for Beta in charge of the majority of its media buying. Two foreign agencies were invited and Sigma, as the existing partner, was called as well. Sigma finally won the bidding due to two competitive advantages as revealed in the interview with the senior manager from Beta. Firstly, the media planning strategies proposed by Sigma were more creative and catered to the needs of Beta. Secondly, the prices quoted by Sigma were much lower than those by the other foreign agencies.
This event was another milestone in the relationship history for two reasons. Firstly, the victory of Sigma in the bidding helped to formalize and solidify the relationship with Beta and paved the way for future relationship development. Secondly, the business relationship between Beta and Sigma was more based on the personal relationship before the bidding. The participation in the bidding gave Sigma a chance to present its competency and professionalism in front of the senior management of Beta, thus, helping to complement and consolidate the ground on which the business relationship was built.
After winning the bidding, Sigma asked for a formal contract with Beta to legalize its position as an exclusive authorized media agency. However, Beta refused to sign the exclusive contract because it did not want to miss chances of cooperating with other agencies in the future who might offer lower prices in some cases. This indicated that
293 prices remained to be the key evaluation criteria of Beta in selecting cooperative partners. After rounds of negotiation, Sigma accepted the suggestion of Beta to cooperate on a case-by-case basis.
The relationship developed rapidly since then. Sigma did a lot more media buying for Beta in Shanghai not only from newspapers but also from other media such as TV and radio. In addition, it offered Beta more services, including proposing new media to facilitate new product launch and doing market research to identify appropriate media for advertising. Sigma was even helping Beta with its crisis management during this period, such as using its media relationship to prevent media reporting negative news of Beta and coordinating between Beta and a local newspaper to solve the dispute.
While Beta and Sigma started to cooperate on more projects, differences between the two firms were detected. Sigma was very quick in making business decisions but Beta was slow. It needed more time to consider and discuss as well as to go through the red tapes before a decision could be made. Besides, Sigma was enthusiastic about innovative ideas for media planning, but Beta would rather take conservative measures and was difficult to be convinced to try new ideas. For instance, Sigma was aware of the trend to internet marketing and recommended Beta to incorporate internet into its media planning. But Beta did not take the advice until 2005. After having a few well-thought proposals rejected by Beta, Sigma was frustrated and its sense of achievement was weakened gradually in the cooperation when its professional knowledge and expertise could not be translated into better services. As a result, it became less motivated to offer creative ideas and suggest new media.
The cooperation progressed smoothly until 2002, when Beta was engaged in a lawsuit in mainland China. It was ordered to shut down and all its capital was frozen indefinitely. For three months, Sigma paid for Beta all its media fees, amounting to nearly half a million dollars, without knowing when Beta could pay it back. This has placed heavy pressure on Sigma, given its limited financial power as a small local firm. But Sigma has never thought of quitting Beta. It was emotionally attached to Beta, which was one of its first clients and helped the growth of Sigma since it began. More importantly, Sigma believed in the integrity of Beta after years of cooperation, that Beta would pay the debt once the internal crisis was over. Sigma was right. Beta paid back
294 all the debt immediately after its capital was unfrozen three months later. It was very touched by the commitment and loyalty of Sigma during the difficult time.
Sigma did not ask to adjust the payment-related items in the contract after this crisis. However, the event did not go without any impact on Sigma and its perception of the relationship. For the first time, Sigma began to worry about the stability of Beta and the relationship with it. This motivated it to try harder to pitch more new clients rather than depending on Beta too much.
A critical event of major conflict between the focal firms happened in 2003. In order to boost the advertising sales for XYZ Newspaper, another newspaper in the same news group, ABC Newspaper adopted a new policy that every media buyer had to buy the same amount of media space in XYZ Newspaper for each dollar spent on ABC Newspaper. This indicates that the advertising budget for Beta could be doubled, given its heavy investment in ABC Newspaper. In order to reduce the burden for Beta, Sigma used its close relationship with the sales team in ABC Newspaper and successfully secured an exclusive deal that Beta only needed to buy once from XYZ Newspaper every four times it purchased from ABC Newspaper. This was the best deal available in the market and much of the credit went to the hard work of James. However, to the surprise of James and Sigma, Sherry was still not satisfied with the deal and blamed James for not being capable enough. This hurt James and his colleagues in Sigma, given the huge amount of effort taken to reach the deal. This event impaired the personal relationship between Sherry and James and strengthened Sigma’s perception of Beta as an ungrateful and difficult client.
11.2.1.3 Stable phase (2004-2006) In 2004, Sherry resigned from Beta. Her position was taken over by Rita Zo, former executive assistant to Sherry. Sherry’s leaving did not produce much impact on the relationship between Beta and Sigma. The senior management in Beta did not request a re-evaluation of the performance of Sigma nor consider replacing it with another agency. This is a sign that Sigma had fortified its position in Beta as its chief media agency, based on its successful performance in the past years of cooperation. A collective confidence in the capability of Sigma has been developed in Beta, which minimized the
295 role of the personal relationship in relationship management, thus, reducing the impact of personnel changes on developing and maintaining the relationship.
The social fabric was not completely gone from the business relationship. Rita had more than a nodding acquaintance with James through an introduction by Sherry. Besides, the GM of Beta would call for meetings with Sigma to discuss the latest trend in marketing media and the effectiveness of different media. This opened up more opportunities for Sigma to impress Beta with its professionalism and expertise, as well as to gradually cultivate personal ties.
The majority of the cooperation carried out in this phase is in the contractual-specific realm, i.e. media buying. Formerly, before Beta placed an order for media buying, it would ask Sigma for quotes and compare with other alternatives in the market to make sure it was the best price. Once Rita became the Planning Manager, she made some adjustment to this aspect. At the end of each year she would have a meeting with Sigma to discuss the media planning and rates for the next year. Once they were approved by the GM in Beta, she would place orders directly in the next year following the agreement. This change turned out to improve the efficiency of cooperation in terms of a shortened decision-making process in Beta and more time for Sigma to coordinate with media.
In 2005, Beta decided to use internet marketing in its new product launch, as suggested by Sigma years ago. Though Sigma would like to get involved in the new project, Beta finally appointed another media agency with specialty in internet marketing. Sigma was disappointed but accepted the decision with understanding. This event illustrates two points. Firstly, in the eyes of Beta, the competitiveness of Sigma lies in the traditional media, not others. Secondly, Beta was rational in selecting partners that it only cooperated in their best field. This indicates that Beta was not ready and willing to take risks in business cooperation.
11.2.2 Trust development and underlying mechanisms Without any concrete experience of cooperation, the calculative trust established between Beta and Sigma at the initial phase of the relationship was more like wishful thinking rather than a true belief. It needed to be tested when firms began to cooperate
296 in the relationship. This indicates the activation the exchange mechanism involving ongoing processes of interaction between the partner firms. Interacting impacts the development of trust through its power of triggering other mechanisms that are able to drive direct changes in the level of trust.
The first such mechanism identified during relationship development is an experiential learning mechanism, operating while the interaction between Beta and Sigma takes place on various occasions, including business and social exchanges in contractual and extra-contractual settings. A key event revealing the function of this mechanism is noticed in the first year of cooperation when Beta asked Sigma to provide data monitoring various media. The fact that Sigma agreed to provide the extra service and that it was able to obtain the important data using its network in the industry was an important learning experience for Beta. It helped Beta to realize the capability of Sigma as well as its goodwill to the partner, thus confirming its initial calculative and affective beliefs in Sigma, which, in turn, substantiated Beta’s trust in the partner firm. Besides, the knowledge of what Sigma could do elevated Beta’s expectation of the scope and quality of services to be achieved in the relationship, which would impact the future development of trust. This indicates the operation of an adapting mechanism, triggered by the experiential learning mechanism.
In this key event, Sigma was doing a favour to Beta, an extra-contractual behavior in the cooperation. As argued in the main case, experiential learning, when functioning in extra-contractual contexts, is more likely to drive changes in affective trust rather than calculative trust. The event in this case shows that the same mechanism affects both calculative and affective trust. The different findings could be explained by the different contexts in which the mechanism functions. In this case, the extra-role behaviors of Sigma were performed at the beginning of the relationship, when Beta was still testing Sigma to confirm and substantiate its initial trust in the partner. Therefore, Beta was collecting all available cues to make a judgment of the capability and benevolence of the partner firm. On the other hand, the argument in the main case was developed based on the observation of extra-role behaviors performed when the relationship was mature, with a stable condition of trust, especially the firmly-grounded calculative trust. Therefore, Xtar Sports and HBB China were less sensitive to evidence related to their partners’ competency, caring more about the goodwill and integrity manifested in the
297 cooperation. The different findings regarding the experiential learning mechanism in this case complement the early theory developed in the main case.
Experiential learning mechanisms operate in another two critical events taking place in 2002 and 2003. In 2002, Sigma did not give up Beta when it was engaged in a serious lawsuit and took the burden of paying all the media fees for Beta when its capital was frozen. The loyalty and commitment displayed heightened the beliefs of Beta in the benevolence of Sigma, enhancing the affective trust placed in Sigma. On the other hand, Sigma’s affective trust in Beta was harmed in the conflict in 2003. When it learned that Beta did not appreciate its hard work to reach the exclusive deal with ABC Newspaper it was not just frustrating but hurtful. As a result, Beta was perceived by Sigma as a self-centered company only interested in pursuing its own business benefits without caring much about its partner’s efforts and contribution. Such adjusted beliefs shook the ground on which Sigma’s affective trust in Beta could grow. These two events show that experiential learning can operate to drive positive or negative changes in partner firms’ beliefs and perceptions of each other and impact the conditions of trust. This complements the examples in the main case that are all related to positive changes generated by the mechanism.
The impaired affective trust of Sigma in Beta as a result of the conflict could also be explained by the operation of an expectation-based evaluating mechanism. The performance of Beta in the event met the expectation of Sigma that Taiwanese companies could be difficult clients to service. The fulfilment of such a negative expectation led to Sigma’s strengthened disbeliefs in the caring and respect of its partner, which, in turn, damaged the building of affective trust in the relationship. This example represents a different context in which the expectation-based evaluating mechanism may operate in business relationships. It demonstrates that when the expectation is low or negative, the fulfilment of such expectations produces negative impacts on the affective and cognitive beliefs that hamper the development of trust between partner firms.
Beta was explicit with its expectations of Sigma, i.e. offering competitive prices for media buying and quality services to meet all its needs. The fact that Sigma was able to fulfil both of these expectations has satisfied Beta. It confirmed and reinforced its
298 beliefs in the capability and professionalism of Sigma, leading to its enhanced calculative trust placed in the partner. This implies another occasion where expectation- based evaluating mechanism functions in the relationship. However, when the relationship reached a stable phase, the same satisfactory performance of Sigma ceased to enhance Beta’s beliefs in it. Instead, it was taken as a norm in the cooperation. This reveals the functioning of an institutionalizing mechanism, which refers to the processes whereby interactions produce regular experiences and outcomes that lead to no new knowledge, no adaptation in firms’ beliefs and no deliberate evaluation of performances. As a result, the level of trust is maintained at a stable point.
To summarize, the discussion of the process of trust development and its underlying mechanism in this case reveals findings that support and complement the findings in the main case. Most of the mechanisms identified in the XtarSports-HBB relationship are to be found as well in this case and explain changes in the degree and nature of trust. Some have functioned in different ways from those in the main case, given the different spatiotemporal contexts of operation. Comparative evaluating mechanisms based on comparison with other relationships and transferring mechanisms are not found in this case. Since the identification of other-based evaluating mechanisms requires knowledge of connected relationships the focal firms have developed in the network, the limited scope and depth of data collected for this case could have missed this aspect. The transferring mechanism refers to how the establishment of calculative trust can foster the interests in individuals in the partner firm, thus, promoting social interactions that help with the breeding of affective trust. Given that the relationship between Beta and Sigma started with thick social fabrics already woven between individuals from the partner firms, transferring mechanisms may not be as relevant, hence not easy to be observed in this case.
11.2.3 Trusting actions and underlying mechanisms A few key trusting actions have been taken during the course of relationship development as outcomes of different combinations of mechanisms.
The first such action was seen in Beta’s decision in 2001 to authorize Sigma as the exclusive agency in charge of the media buying for ABC Newspaper. This was a big decision to Beta, given the strategic importance of and its heavy reliance on advertising
299 in ABC Newspaper. The existence of the calculative trust in Sigma developed in the past year of cooperation, based on its competent performance, provided the attitudinal prerequisite needed to act trustingly. But the trusting action was motivated as well by Beta’s behavioral intentions. Given the important role of ABC Newspaper in the overall advertising campaign, Beta was very careful in hunting for a new agency to take over the business. The unexpected situation happening to the old agency has been a caution to Beta that urged it to pick a reliable and trustworthy agency. This indicates a high level of perceived importance of relying on trust to cope with the emergency, which increased the desire of Beta to proceed with the trusting action. This analysis shows the functioning of a coping mechanism that generates intentions to take trusting actions. But the personal relationship between Sherry and James also played a role in fostering such intentions, implying the operation of social bonding mechanism. The emotional ties instilled in Sherry a desire to manifest her trust in Sigma by strengthening the cooperation with it, thus, increasing the behavioral readiness of Beta to take the trusting action of authorization.
Another key event occurred in the end of 2001, when Beta refused to sign a formal contract with Sigma to legally appoint it as the exclusive media agency after it won the contest against the other two agencies. This is an example of the focal firm NOT taking trusting actions in the relationship. However, the lack of a trusting action didn’t necessarily mean a lack of sufficient trust placed by Beta in Sigma. Rather, it shows the lack of a strong enough behavioral intention to act. As revealed in the analysis above, Beta was very price-oriented in selecting partners for cooperation. Such a corporate culture determined the key benefits Beta would seek from the cooperation, which was the lowest prices in the market for media buying. Since signing the contract to authorize Sigma as an exclusive agency meant that Beta might lose chances in the future for better media prices provided by other agencies, taking such actions could not fully satisfy the corporate needs of Beta, thus, leading to its low behavioral readiness to act trustingly with the contract. This event illustrates the operation of the evaluating mechanism in hampering the occurrence of trusting actions, complementing the findings in the main case where evaluating mechanisms have been observed to operate to encourage the occurrence of trusting actions only.
300 The response of Sigma to the decision of Beta is another critical event related to trusting actions. Sigma’s acceptance of cooperating without a formal contract was a strong manifestation of its trust in Beta. This could be explained by the combined operation of coping, evaluating and social bonding mechanisms. The risks of being replaced by another agency without the legal protection of a formal contract motivated Sigma to rely on its trust to reduce the perceived risk and cope with the uncertainty. On the other hand, the strong internal need to keep Beta in the relationship for future corporate development further enhanced Sigma’s behavioral readiness to take such trusting action. Finally, the personal relationship also encouraged James to be cooperative with Beta by behaving trustingly.
Beta experienced a severe internal crisis in 2002. During the course, despite lack of knowledge of when Beta would be able to clear the debt, Sigma continued to pay all the media fees for Beta and provide full client services as usual. These are trusting behaviors with strong and clear manifestation of trust in Beta. A social bonding mechanism, once again, played an important role in motivating the behavior, but was not the only one. As explained by James, Beta was the first client Sigma was able to secure when it was a newly-established small firm. It appreciated the trust that Beta placed in it in those early days and felt obliged to support its partner when it was in trouble. A reciprocity mechanism is thus identified as operating in this event. While the examples in the main case all point to the immediate effect of a reciprocity mechanism, this event shows there could be a time span between the original trusting action and the responding one. The effect of the original trusting action could be reserved in the form of enhanced/reduced affective trust, which will be activated to form future trusting actions in given circumstances. This observation provides more evidence of the heavy context-bound nature of trusting actions.
After handing over to Sigma the media buying business for ABC Newspaper, Beta gradually expanded the cooperation by giving Sigma more and bigger deals of media purchasing from various media. In 2004, Beta decided to place orders directly without comparing the quotes offered by Sigma to those from other agencies. This is another example of trusting action taken in the relationship. It reflects the well-entrenched trust Beta has developed in Sigma, based on its satisfaction with Sigma’s consistent performance throughout the cooperation. It further reveals the operation of a self-
301 efficacy mechanism, which refers to the process whereby firms rely on their perceived interpretation of the performance of their partners to determine their intention to take trusting actions. One trusting action may lead to another, when the outcome of the early one is positive.
The last key event concerning trusting actions took place in 2005. Beta appointed another agency responsible for its internet marketing, despite the expressed interest of Sigma. This is another example of non-trusting action but caused for different reasons. In this event, the lack of trusting action is due to a lack of sufficient calculative trust in Sigma’s competency and professionalism in the area of e-marketing, in other words, without enough trust existing in the relationship as a precondition, trusting actions do not occur. This points to an important finding that calculative trust has a strict boundary that cannot be easily expanded. Beta’s calculative trust in Sigma rests with its capability in traditional media. It cannot be taken for granted that the trust in one area will be transformed to trust in other areas without being tested and proved. As trusting actions are based upon the existence of trust, such a boundary feature of calculative trust forecasts the realm in which trusting actions may occur.
11.3 Conclusion The main purpose of incorporating supplementary cases into the research is to test the mechanisms identified in the main case in a different context. The Beta-Sigma relationship represents another type of environment from that in the XtarSports-HBB relationship in terms of background of the focal firms, initial conditions of the relationship and content of cooperation. This provides new soil in which trust develops and is activated, driven by different sets of underlying mechanisms.
Tables 11.1 and 11.2 summarize the findings in the supplementary case and compare them to those in the main case. As shown in the tables, most of the mechanisms identified in the main case are detected in the supplementary case as well but operating in different ways, given the different contexts. They are triggered by different mechanisms and connected in assorted sequences and ways to produce changes. These differences are important complementary findings that augment the existing knowledge of generative mechanisms in the dynamics of trust in business relationships. They
302 further demonstrate the actor-based, spatiotemporal, processual and hierarchical characteristics of mechanisms, which cannot be understood by reducing to a list of variables that are correlated consistently and uniformly over time to produce outcomes.
303 Table 11.1 Comparison of mechanisms for trust development identified in the main case and supplementary case I
Mechanism XtarSports-HBB relationship Beta-Sigma relationship Synergy/Reconciliation (main case) (supplementary case I) Historical learning mechanism Identified to produce direct impact on the Identified to produce both direct and When one of the outcomes of historical building of initial trust indirect impact on the building of initial learning mechanism is social bonds as trust residues of past relationships, the impact of this mechanism on initial trust development is realized through the activation of affective mechanism Formative evaluating mechanism Identified Identified Findings agreed Stereotyping mechanism Identified to enhance the building of initial Identified to impair the building of initial Mechanisms are continuous processes trust trust that are capable of causing positive or negative changes in the system where they operate. Exchange mechanism Identified Identified Findings agreed Experiential learning mechanism Identified to enhance trust development Identified to both enhance and impair trust Mechanisms are continuous processes development that are capable of causing positive or negative changes in the system where they operate. Identified to enhance the development of Identified to enhance the development of The spatiotemporal context in which affective trust when operating in extra- both calculative and affective trust when experiential learning mechanism operates contractual settings operating in extra-contractual settings determines its output. When operating in an extra-contractual setting in the early stage of cooperation, the mechanism will generate changes in both calculative and affective beliefs, leading to adjusted conditions of calculative and affective trust. When operating in an extra- contractual setting in the mature stage of cooperation, the mechanism will be more likely to generate changes in affective beliefs, leading to adjusted conditions of affective trust. Adapting mechanism Identified Identified Findings agreed Comparative evaluating mechanism Identified to enhance the development of Identified to impair the development of When expectation is high and positive,
304 Mechanism XtarSports-HBB relationship Beta-Sigma relationship Synergy/Reconciliation (main case) (supplementary case I) based on expectation trust when expectation is fulfilled trust when expectation is fulfilled the fulfilment of expectation will generate positive changes in the level of trust. When expectation is low or negative, the fulfilment of expectation will generate negative changes in the level of trust. Affective mechanism Identified during the relationship Identified during the initial phase of the The key contextual determinant of development relationship whether or not an affective mechanism will be triggered is not the evolutionary stage of a business relationship but the existence of personal affection in the relationship Transferring mechanism Identified Not identified This could be explained by the different initial conditions of the two relationships. The business relationship between XtarSports and HBB China started with no pre-existing personal relationship, while the Beta-Sigma relationship started with thick social fabric already woven. Institutionalizing mechanism Identified Identified Findings agreed
305 Table 11.2 Comparison of mechanisms for trust activation identified in the main case and supplementary case I
Mechanism XtarSports-HBB relationship Beta-Sigma relationship Synergy/Reconciliation (main case) (supplementary case I) Coping mechanism Identified Identified Findings agreed Evaluating mechanism Identified leading to the emergence of Identified leading to the emergence and Mechanisms are continuous processes trusting actions non-emergence of trusting actions that are capable of causing changes or non-changes, actions or non-actions in the system where they operate. Stereotyping mechanism Identified at the inception of a business Not identified Stereotyping mechanism is less likely to relationship leading to the emergence of operate in a new business relationship trusting actions with the pre-existence of personal relationship. The first-sight judgment based on stereotypes is no longer necessary when people know each other already. Social bonding mechanism Identified during the course of relationship Identified at the initial stage of the The key contextual determinant of development relationship and during the relationship whether or not a social bonding development mechanism will be triggered is not the evolutionary stage of a business relationship but the existence of personal affection in the relationship Reciprocity mechanism Identified to produce immediate effect on Identified to produce delayed effect on the The operation of reciprocity mechanism the occurrence of trusting actions occurrence of trusting actions may take a long process as it does not always produce immediate effect on the emergence of trusting actions or not. There could be a time span between original trusting action and responding trusting action. Self-efficacy mechanism Identified Identified Findings agreed
306 Chapter 12 Analysis and Discussion of Supplementary Case II
This chapter describes the findings in the second supplementary case of the relationship between ACE Event Operation Corp. and Ups Glasses Manufacturing Company from 2005 to 2007. ACE Event Operation Corp. (referred to as ACE hereafter) is a state- owned company established in 2004, when Shanghai won the hosting right for Formula 1 car racing. Its major business is to develop, market and manage Formula 1 licensed products in China. Ups Glasses Manufacturing Company (referred to as Ups hereafter) is a Chinese private-owned enterprise set up in 2001. It started with the business of manufacturing spectacle lenses but later extended to the manufacturing of spectacle frames.
The relationship between ACE and Ups began in 2005. After six months of negotiation, ACE signed a five-year contract with Ups that authorized it to develop, manufacture and market Formula 1 franchised spectacles under the supervision of ACE. The content of the cooperation between ACE and Ups represents a different relationship context involving, in particular, a different type of power relation between the parties involved, within which the nature and role of trust dynamics and underlying mechanisms are examined.
In the rest of this chapter, the process of relationship initiation in 2005 will be described, together with a discussion of the initial building of trusting attitudes and the undertaking of relevant trusting actions in the relationship. Following that, the relationship development between 2005 and 2007 will be presented, which lays the ground on which a discussion of development of trusting attitudes and emergence of trusting actions and the mechanisms involved are developed. Finally, this chapter ends with a brief conclusion.
12.1 Relationship initiation and the dynamics of trust 12.1.1 Relationship initiation Since its establishment in 2004, ACE has been in charge of managing the franchise business of Formula 1 in China. It had cooperated with different manufacturers to make a range of franchised products available in the Chinese market, including clothing,
307 accessories, bags and souvenirs. The model of cooperation in these relationships was that ACE was responsible for new product development, branding and marketing, while the partner firms were responsible for manufacturing the products as instructed by ACE. By doing so, ACE had complete control over the management of the brand of Formula 1 in China, however, it also cost ACE huge efforts and investment to set up distribution channels around the country and manage the sales of franchised products. While ACE was successful in increasing the brand awareness of Formula 1 in China, the sales of its franchised products progressed slowly. One of the reasons was a lack of extensive and efficient distribution network for the products.
At the beginning of 2005, ACE organized a large-scale event to attract more partners, such as suppliers, manufacturers and advertising agencies, to cooperate on the franchise business. Introduced by a friend, the General Manager of Ups, Mr. Kevin Lo, attended the event where he met the Deputy General Manager of ACE, Mr. John Wong. By that time, Ups was already a well-known spectacles manufacturer in the industry, not only because it had been in the industry for a long time but more noticeably, it had cooperated with quite a few global brands, such as Gucci and Versace, as their authorized manufacturer for spectacles.
The negotiation started soon after the meeting at the event when both parties expressed their interest in cooperation. ACE wished to extend its line of Formula 1 franchised products to boost sales, while Ups had a desire to work with a big brand to develop its business. The original idea of ACE was to authorize Ups as a manufacturer of Formula 1 branded spectacles. However, as the negotiations went along, Ups proposed that it could do more than being a manufacturer. With its well-established distribution channels in most major optical stores especially in Shanghai, Ups could take charge of sales as well, which would save a great amount of efforts by ACE on sales management. Given the former not so successful experience of relying on itself to build new distribution channels and manage the sales, ACE was attracted by the idea immediately and perceived it as a good chance to increase its marketing efficiency. However, since this was a brand new model of cooperation, ACE was very prudent in selecting partners. It asked Ups to submit documents regarding the company profile, product introduction, record of clients, and even resumes of its senior managers. John, the Vice General Manager, paid visits to the factories of Ups as fact-finding tours. In addition, ACE
308 placed small trial orders to Ups to examine the quality of its products. Based on the facts found in these inspections, ACE finally agreed to sign a five-year exclusive contract with Ups in July, 2005. Being aware that it could take years to build a new brand in the market before the company could make money, Ups wished to sign a longer contract to secure the return for its initial investment. However, since the first contract between ACE and the Fédération Internationale de l'Automobile (referred to FIA hereafter), the governing body of Formula 1, was for five years and it was not sure by then whether the contract would be renewed, ACE was not able to sign a contract for a longer term with Ups. Ups accepted the decision with understanding.
According to the contract, ACE would supervise the use of the logo of Formula 1, while Ups was in charge of new product development, production and sales. Ups agreed to pay a franchise fee and a certain percentage of sales revenues to ACE. Both firms had practical goals and objectives for the relationship. The major expectation ACE laid on Ups was to enhance the exposure of Formula 1 franchised products in the national market by using its advantage of extensive distribution channels and effectively promote the sales. As for Ups, it wished to make profits by selling Formula 1 franchised products and enhance its capability of brand management and marketing for the future launch of its own brand.
12.1.2 Development of initial trust and underlying mechanisms ACE’s initial impression of Ups was formed with two observations. Firstly, Ups was a company owned by Wenzhounese. Wenzhou was a small city in south eastern China, with a vast population being business entrepreneurs. Wenzhounese were widely perceived as smart in business, but they were also known for being credible and trustworthy as well. Therefore, the knowledge of this demographic feature of Ups led to ACE’s positive beliefs of the integrity of Ups at first sight, as a result of the operation of stereotyping mechanisms. Secondly, Ups was a well-known company in the optical industry with access to extensive distribution channels. This is an important complementary resource sought by ACE. ACE also checked its clientele, based on the documents provided by Ups, which revealed a list of long-term clients including Gucci and Versace. Such experiences of working with prestigious global brands instilled in ACE the initial confidence in Ups’ capability to produce quality products and to provide satisfactory client services. This led to the development of initial calculative trust in Ups.
309 The functioning of historical learning mechanisms and formative evaluating mechanisms also exist, as when ACE relied on the second-hand knowledge, especially of visible resources, to evaluate the potential partner.
Experiential learning took place as well at this initial phase of the relationship. This can be seen in two ways, John Wong, the Deputy GM of ACE, visiting Ups’ factories in different cities for inspection and ACE making small trial purchases from Ups. John was impressed by the scale and quality of production Ups was capable of. This was further proved when the products ordered by ACE turned out to be delicate and high- quality. These concrete experiences, though limited, strengthened the beliefs of ACE in the professionalism and capability of Ups, leading to a firmer ground on which calculative trust was built.
Compared to the prudence and sensitivity of ACE, Ups turned out to be more practical and straightforward in developing its trust in the partner firm, with historical learning mechanisms being the key driver. Without sufficient knowledge of ACE as a company, Ups built confidence in the partner firm based on its belief in the strength of the Formula 1 brand, a key resource possessed by ACE, much like the tennis event rights held by Xtar Sports in the main case. Ups’ appreciation of the brand power of Formula 1 is based on its knowledge of the reputation of Formula 1 throughout the world as well as its self-perception in terms of what it possessed and needed. As a small private- owned company, Ups felt it difficult to set up its own brand. Therefore, the prestige and worldly reputation of Formula 1 was perceived to be an important complementary resource to Ups. It believed that the association with Formula 1 would produce valuable benefits to its future business development. In light of this, it can be argued that the initial trust of Ups in ACE was dominantly based on the perceived complementary value of the key resources possessed by ACE. This provides another evidence of the critical role of the evaluating of visible resources impacting initial beliefs in partner firms.
In conclusion, the business relationship between ACE and Ups started without preexisting personal ties, nor any other form of relationship energy. This indicates that in general, the initial trust developed between the focal firms is grounded more on calculative beliefs rather than emotion-based affective beliefs. An investigation of
310 relationship initiation further reveals that calculative beliefs were shaped as a result of different processes in ACE and Ups. Historical learning, experiential learning and stereotyping mechanisms operate together in driving the initial trust of ACE in Ups, while the initial trust of Ups in ACE is mainly an output of historical learning and formative evaluating mechanisms.
12.1.3 Trusting actions and underlying mechanisms The most salient trusting action undertaken during this phase is the agreement by the partner firms to forge a formal business relationship, despite a lack of cooperation in the past. Behind the action was the operation of coping and evaluating mechanisms.
Both ACE and Ups were faced with various risks at the time of relationship initiation. The risks for ACE arose from environmental unpredictability and behavioral uncertainties of its partner firm. Firstly, the Chinese market was still immature and unpromising for the sales of franchised products, when the brand of Formula 1 was not widely known and accepted in the market. This was reflected in the unsatisfactory market performance of other franchised products in China. In light of this, adding another franchised product into the line meant increased pressure on ACE to deal with the unpredictable market. Secondly, it was the first time for ACE to trust a partner firm to take over the manufacturing and marketing of a franchised product. Given a lack of experience of cooperating with Ups in the past, ACE was not sure whether or not Ups would fulfill the relational tasks as expected. This added to the risks faced by ACE at the time. These uncertainties arising from the market environment and the future behaviors of the partner firm urged ACE to rely on its calculative and affective trust in Ups to cope with the perceived risks, enhancing its intention of take the trusting action of cooperating with Ups.
The risk for Ups was due to the term of the contract signed with ACE. Based on its knowledge and expertise of doing business in the spectacles industry, Ups forecast that it would take a few years before the company could make profits from the sales of Formula 1 franchised spectacles. Heavy investment was needed to enhance brand awareness in the market and to launch marketing campaigns to promote the sales. When ACE was only able to sign a five-year contract, Ups was deeply concerned that its initial investment would be in vain and that the contract would end before it was able to
311 make profits. The short-term contract added to the risks faced by Ups, in addition to the unpredictability of the market. It motivated Ups to rely on its trust in the capability of ACE to help with the branding and marketing of the product, as well as the benevolence of ACE that it would renew the contract in the future if its contract with FIA continued.
The above analysis of the situations of ACE and Ups reveals the operation of coping mechanisms when both partner firms built their intentions of relying on the trust in each other to cope with various risks. Such intentions could be further strengthened by the operation of an evaluating mechanism, in that the attraction of the new relationship was also based on the match between perceived relational benefits and the partner firms’ corporate objectives.
ACE’s former experience of relying on itself to establish new distribution channels and manage the sales was not a great success, despite the huge financial investment. This led to the company’s determination to seek an alternative way to enhance the efficiency of marketing of the Formula 1 franchised products. ACE was ready to develop a new type of cooperation with potential partners to achieve better sales performance in the market. This explains the intention of ACE to take the chance of cooperating with Ups following a new model, an outcome of the operation of an evaluating mechanism whereby ACE evaluated the potential relational benefits to determine how compatible they were to its corporate goals.
A similar process of evaluating occurred for Ups as well. After being a manufacturer of spectacles for other brands since its establishment, Ups was planning to set up and launch its own branded spectacles in the future. This demanded not only sufficient capabilities of production but also expertise in new product development and marketing. Therefore, Ups was seeking opportunities to test and hone these skills by collaborating with big brands. In light of this, Ups had a strong intention to cooperate with ACE on producing and marketing its franchised products, when the benefits of cooperation were perceived to be consistent to its corporate objectives.
In conclusion, the trusting actions of agreeing to start the cooperation is a pure business decision that ACE and Ups made to address the challenges in the market and to achieve their respective corporate objectives. In particular, coping mechanisms and evaluating
312 mechanisms are two key drivers behind the construction of the focal firms’ intentions of acting trustingly, which lead to the ultimate occurrence of the trusting action.
12.2 Relationship development and the dynamics of trust 12.2.1 Relationship development The narrative data collected for the ACE-Ups relationship covers the first three years of the cooperation from 2005 to 2007. This period witnessed a smooth unfolding of the relationship, when the focal firms took time to learn about each other. A few critical events occured during this time, which affected the beliefs, perceptions and expectations of the focal firms. Though these changes did not directly influence relationship development, they may result in future impacts on relationship development.
Since the beginning of the relationship, Ups had spared no efforts in increasing the brand awareness of Formula 1 and promoting the sales of franchised spectacles. It adjusted its organizational structure and placed more emphasis on new product development. More designers were recruited to enhance the corporate capability in this aspect. Regarding the distribution, Formula 1 spectacles were placed in most of the major optical stores in Shanghai. Furthermore, Ups organized and sponsored a large- scale training program for all the shop assistants working in those stores to get them trained with relevant knowledge of the Formula 1 brand as well as sales techniques. Ups attended all the industry exhibitions and shows to exhibit Formula 1 spectacles. In 2006, it even paid thousands of dollars to hire a Formula 1 racing car at an exhibition to promote the brand and its franchised products.
While Ups was committed to the branding and marketing of Formula 1 spectacles, ACE invested heavily as well to promote the brand of Formula 1 and its franchised products. It was also learning how to appropriately manage the franchise. A lesson was learned through an event in 2005. ACE was allowed to open a retail shop in the stadium where Formula 1 car racing was held in Shanghai. ACE named the shop ACE F1, in the hope of promoting its own brand together with Formula 1. However, when it was noticed by officers from FIA, it led to an appeal by FIA accusing ACE of violating the legal rights of official sponsors of Formula 1. These were the only companies that were legally
313 permitted to connect their corporate brands with the brand of Formula 1. The problem of the appeal was eased by a formal apology made by ACE.
This event made ACE realize the complexity and sensitivity of regulations related to managing the franchise of Formula 1. As a result, it became more careful with the use of the logo of Formula 1 in marketing campaigns. However, another event occurred in 2006, which made ACE again in the trouble with FIA.
In May 2006, a market inspector of FIA found that a store in Shanghai did not scan the anti-counterfeiting label attached to each pair of Formula 1 spectacles when the product was sold. A further investigation revealed that similar practices were happening in most of the other stores that sold the franchised product. This was due to the fact that Ups did not attach the label to the spectacles but instead, put it in the spectacles box. According to FIA regulations, every Formula 1 franchised product should have an anti- counterfeiting label attached and scanned when it is sold. A certain percentage of the sales revenue, based on the scanned data, has to be submitted to FIA as part of the franchise fee. In light of this, the practices of those stores were seen as cheating by FIA. However, as explained by Ups, the misconduct was not intentional but due to its lack of sufficient knowledge with the regulation. To solve the dispute, ACE submitted a report to explain and apologize to FIA. The apology was accepted by FIA, but ACE was still requested to pay a fine, according to the regulation of FIA.
This event was a serious lesson, not only for ACE but Ups as well. As a result, ACE worked more closely with Ups to supervise the sales of the franchised product. It would send its own officers to inspect the stores to make sure that things were on the right track. More training was organized in Ups regarding relevant regulations of FIA to guide their practices in the market. No more violations have happened since 2006.
In general, ACE and Ups were having pleasant experiences from cooperating in the relationship. ACE was satisfied by the heavy investment by Ups to build up the market and boost the sales, while Ups was impressed by the capability of ACE in promoting the brand of Formula 1 by integrated marketing campaigns. However, they expected to achieve more from each other and the relationship. Ups failed to reach a breakeven point in the first two years of the contract. Though Ups was prepared for this, it believed
314 that the situation could have been better if ACE had provided more support in branding and marketing, such as opening a flagship store in Shanghai for all Formula 1 franchised products. On the other hand, ACE was aware that Ups focused its marketing efforts more on the Shanghai market but did not do enough in other markets in China. It expected Ups to help more with the development of the national market for Formula 1 spectacles.
ACE and Ups would have regular meetings once every month. However, since the two companies were located in the same neighborhood, there would be many informal visits to each other, especially after it was discovered that both John and Kevin were coffee lovers. The mutual interest bridged the gaps between the two, leading to the gradual development of a personal relationship. The familiarity between the key personnel smoothed over communication of problems and difficulties faced by the partner firms. Kevin was frank to John regarding its wishes to have more support from ACE to market the franchised spectacles. In response, ACE opened its distribution channels throughout the nation to Ups to place Formula 1 spectacles. This support was greatly appreciated by Ups and gave it more confidence of building up sales in the near future.
In 2006, the Shanghai Municipal Government was seeking business partners to design, manufacture and market Shanghai WorldExpo franchised products, and authorized ACE to be in charge of the business. Being aware of the interest expressed by Ups in expanding the cooperation and impressed by the successful record of cooperation in the past, ACE brought Ups into the business and asked it to be an intermediary to find appropriate manufacturers for the WorldExpo franchised products. This event marked the expansion of the cooperation between ACE and Ups into a new business. More importantly, it reflected the well-established confidence of ACE in Ups developed over time as part of successful cooperation.
12.2.2 Trust development and underlying mechanisms As the focal firms had more chances to interact with each other in the cooperation, more exchange of information and resources took place resulting in experiential learning whereby ACE and Ups confirmed and updated their initial beliefs in each other. This led to changes from the initial conditions of trust. For example, ACE was impressed by the efforts displayed by Ups in improving the sales of Formula 1 spectacles, such as
315 developing new products, sponsoring training programs for shop assistants and attending industrial exhibitions to increase the exposure of the brand and the product. These observations bred beliefs in the genuine commitment of Ups to the relationship, leading to the building of benevolence-based affective trust in Ups. The affective trust of Ups in ACE was enhanced when ACE listened to the complaints of Ups regarding its insufficient support to the marketing of the franchised spectacles and offered help by allowing Ups to access into its nationwide distribution channels for the product placement. The adapting of ACE’s behavior in the relationship strengthened the beliefs of Ups in the goodwill of its partner, which, in turn, elevated the affective trust in ACE. This provides an example of the operation of behavioral and cognitive adapting mechanisms in driving changes in the conditions of trust in the relationship.
One of the key attractions of Ups to ACE was its access to extensive distribution channels, especially in Shanghai. The fact that Ups was able to place the Formula 1 franchised spectacles in most of the major spectacles stores in Shanghai met the major expectation of Ups and confirmed the initial beliefs in Ups regarding its capability of opening up the market for the new franchised product. As a result, the initial calculative trust in Ups was confirmed and strengthened. The observation of this process reveals the operation of evaluating mechanism based on results being compared with expectations.
A critical event that challenged the conditions of trust in the relationship was the one occurring in 2006 when Ups was caught in its misconduct when selling Formula 1 franchised products. Interestingly, as revealed in interviews, this event did not impact the trust of ACE in Ups. Three mechanisms were identified to operate that led to the non-change in the trusting attitude.
As for ACE, it viewed domestic companies as different from Western companies in terms of their understanding and practice of intellectual property rights. It believed that Chinese companies still had a lot to learn about how to respect intellectual property rights and integrate them into their business practices. Therefore, these companies could easily make mistakes and violate these rights in doing business. Given this, ACE did not find it difficult to understand the mistakes made by Ups. This uncovered the operation of a stereotyping mechanism that Ups was grouped by ACE into a certain category that
316 affected how ACE interpreted and evaluated its performances. Based on the findings of the main case, stereotyping mechanisms are more likely to occur at the inception of a business relationship when partner firms rely on the first sight to judge each other. The identification of the mechanism in this event complements the point by revealing that stereotyping mechanism could be latent at one time in a relationship but active at another. When it operates during relationship development, it is more likely to trigger evaluating mechanisms through its impact on the expectations of the partner firms. This is explained in detail in the following.
With the stereotypes of Chinese companies as insufficiently educated about and experienced in applying intellectual property rights, ACE developed a low expectation of Ups in terms of its accurate understanding of the regulations of FIA and its ability to strictly abide by them. This indicated that ACE was mentally prepared for the mistakes made by Ups. Therefore, in a sense, the misconduct of Ups in the event of 2006 met the expectations of ACE and did not reduce the trust placed in Ups. The detection of the functioning of expectation-based evaluating mechanisms in this occasion reinforces the argument in the main case of the importance of setting up reasonable expectations about partner firms. The argument is further developed, based on the findings in this event, that an appropriate expectation can help to reduce the impact of a firm’s negative performances in the relationship on the level of trusting attitudes.
The expectations of ACE regarding Ups were also affected by the event occurring in 2005, when ACE was caught by FIA in the misuse of the logo of Formula 1. This experience helped ACE to realize the complex and stringent regulations of FIA in terms of the use of the Formula 1 brand. It also affected its expectation of the partner firm regarding their practice in these matters. This reveals experiential learning mechanisms functioning in a different way. It complements the argument developed in the main case to show that experiential learning occurs not only when firms observe the behaviors and performances of their partners but also when firms themselves go through learning experiences within or outside the focal relationship and gain and adjust their cognitions. This impacts the expectations of partner firms, based on which evaluating mechanisms operate to produce changes in the conditions of trust in the relationship.
317 In summary, most of the mechanisms identified in the main case are detected in this case as well driving changes in the nature and degree of the trusting attitudes developed between the partner firms. Complementary findings are reported that offer additional insight into the operation of some mechanisms. Stereotyping occurs not only at the inception of the relationship but also during relationship development, when they trigger evaluating mechanisms through the impact on the expectations of the partner firms. Experiential learning operates when firms themselves go through learning experiences within and outside the focal relationship to gain new knowledge and adjust their cognitions, including their expectations of the partner. The importance of setting up reasonable expectations about partner firms is further highlighted in this case, in terms of the way firms respond to each others’ mistakes. An appropriate expectation can help to reduce the impact of a firm’s negative performances in the relationship on the level of trusting attitudes developed by its partner firm.
Affective mechanisms and transferring mechanisms, which are related to the interaction between calculative and affective trust, are not obvious in this case, except in the way the developing personal interactions between two people made communication more open and easier. I only have knowledge about the first three years of the relation and calculative trust and affective trust between ACE and Ups have not been firmly grounded yet. As a result, the impact they can have on each other may not be strong and observable. Institutionalizing mechanisms, which refer to a stable state of trust between the partner firms in the relationship, is not identified, either, which is again due to the limited period involved. The relationship between ACE and Ups is still developing with increasing interactions taking place and new types of cooperation recently added. The relationship has not stabilized yet and institutionalizing mechanisms may not be relevant.
12.2.3 Trusting actions and underlying mechanisms Due to the short history of the relationship, few trusting actions have been taken by the partner firms in the relationship. The majority of the interaction from 2005 to 2007 took place in a contract-specific context, indicating the role of the contract as a key economic power to connect the focal firms and drive relationship development. However, ACE’s introduction to Ups of the new project related to WorldExpo franchised products is an example of a trusting action.
318 Before ACE extended the cooperation into the new area, it had worked with Ups for over a year and built confidence in the capability and integrity of Ups. Satisfaction with its performance increased its intention to take another trusting action to develop the cooperation into a new area. This reveals the operation of a self-efficacy mechanism, a process whereby firms rely on their perception and interpretation of the performance of their partners to determine their intention to proceed with acting trustingly.
Choosing Ups for the new project can also be explained by a coping mechanism. The fact that the new project was assigned by the local government had put pressure on ACE. In order to reduce the risk of failure, it would rather cooperate with an existing partner with a good record of performance and well-proved capabilities. In this sense, ACE’s reliance on its trust in Ups was a way to handle the potential risks.
12.3 Conclusion In addition to the supplementary case of Beta-Sigma relationship discussed in the last chapter, the relationship between ACE and Ups presents a new type of context to test the presence of mechanisms identified in the main case. This relationship is different from the other two cases in terms of the background of the focal firms, initial conditions of the relationship and the nature of cooperation.
Tables 12.1 and 12.2 summarize the findings in this supplementary case and compare them to those in the main case. Most of the mechanisms identified in the main case that underlie the process of trust development operate in this case as well but some in different ways. They are triggered by different mechanisms and new contexts are identified in which these mechanisms may function. Such differences provide additional insights to explain changes in the conditions of trust between partner firms in a business relationship. However, due to the short relationship history, very few trusting actions have been undertaken in the relationship, which restricts the range of mechanisms identified in the case. Coping, evaluating and self-efficacy mechanisms are identified as affecting trusting actions. They operate in similar ways to those in the main case.
319 Table 12.1 Comparison of mechanisms for trust development identified in the main case and supplementary case II
Mechanism XtarSports-HBB relationship ACE-Ups relationship Synergy/Reconciliation (main case) (supplementary case II) Historical learning mechanism Identified Identified Findings agreed Formative evaluating mechanism Identified Identified Findings agreed Stereotyping mechanism Identified at the inception of a Identified at the inception of a business Stereotyping mechanisms could be latent at business relationship relationship and during the relationship one time in a relationship but active at development another. When it operates during the relationship development, it is more likely to trigger evaluating mechanisms through its impact on the expectations of the partner firms. Exchange mechanism Identified Identified Findings agreed Experiential learning mechanism Identified to operate when firms Identified to operate when firms observe the When experiential learning mechanisms observe the behaviors and behaviors and performances of their partners operate when firms themselves go through performances of their partners in the in the relationship and when firms experiences within and outside the focal relationship themselves go through experiences within relationship to gain and adjust knowledge, and outside the focal relationship to gain and the mechanism will trigger evaluating adjust knowledge mechanisms via its impact on the expectations of partner firms. Adapting mechanism Identified Identified Findings agreed Comparative evaluating mechanism Identified in events related to partner Identified in events related to partner firms’ The argument of the importance of setting up firms’ positive performances in the negative performances in the relationship reasonable expectations on partner firms is relationship further developed that an appropriate expectation can help to reduce the impact of a firm’s negative performances in the relationship on the level of trusting attitudes developed by its partner firm. Affective mechanism Identified Not identified By the time of data collection, the personal relationship between the senior managers in ACE and Ups was still under development, therefore, its impact may not be strong and observable. Transferring mechanism Identified Not identified The propeller for the development of personal relationships was the discovery of 320 Mechanism XtarSports-HBB relationship ACE-Ups relationship Synergy/Reconciliation (main case) (supplementary case II) mutual interest between the key personnel in the partner firms, so it was nothing to do with the impact of the establishment of the calculative trust in each other. Institutionalizing mechanism Identified Not identified By the time of data collection, the relationship was still developing with increasing interactions taking place and new content of cooperation added. The relationship was not stabilized yet, thus, not appropriate for institutionalizing mechanisms to operate.
321 Table 12.2 Comparison of mechanisms for trust activation identified in the main case and supplementary case II
Mechanism XtarSports-HBB relationship ACE-Ups relationship Synergy/Reconciliation (main case) (supplementary case II) Coping mechanism Identified Identified Findings agreed Evaluating mechanism Identified Identified Findings agreed Stereotyping mechanism Identified Not identified Due to the short relationship history, few Social bonding mechanism Identified Not identified trusting actions have happened during Reciprocity mechanism Identified Not identified the course, thus, restricting the scope of mechanisms to be identified. Self-efficacy mechanism Identified Identified Findings agreed
322 Chapter 13 Conclusion
Cooperation between firms involves mutual reliance and requires trust to succeed (Child 1998). As noted by Smith and his colleagues, “although research has identified many determinants of cooperation, virtually all scholars have agreed that one especially immediate antecedent is trust” (Smith, Carroll and Ashford 1995, p10). However, what scholars fail to agree on is what trust is and how it works in business relationships. Is trust a variable or an experience? Is trust static or dynamic? How does trust develop and change? Is trust always active as a driving force in relationship development? Can managers control the development of trust?
The research reported in this thesis aims to enhance the understanding of trust in business relationships by answering these questions, based on in-depth case studies of relationship histories. A literature review revealed that the majority of studies on trust have been ahistorical, aprocessual and acontextual. They treat trust as attributes of relationships and present static models that correlate trust to a list of variables. The specific processes through which trust develops are less understood and calls have been made for a greater understanding of the dynamics of trust (Rousseau, Sitkin, Burt et al. 1998). Though static models are useful in providing “snapshots”, changes should be understood from a “moving picture” view (Buttris 2009).
To address these calls, this research adopts a processual approach and argues that trust is an ongoing dynamic experience. It is influenced by the spatiotemporal context of the relationship and co-evolves with other dimensions of a business relationship. Table 13.1 presents a summary of the evaluation of propositions related to the dynamics of trust as suggested in Chapter 4. Most of the propositions are supported by the case studies. The view of trust that emerges is that the nature and extent of trust, as an attitude towards another, is continually being shaped and restructured by the experience and outcomes of the actions and interactions within and between firms and how they are interpreted by the parties involved. The sustainability of trust is about the process by which it is reproduced, developed and changed or not over time. As Van de Ven (1992) argues, process theories should include starting conditions and an emergent process of changes. This research shows that the evolution of trust in business relationships undergoes a cyclical path of starting conditions and on-going production and reproduction over time,
323 whereby its nature and extent are impacted by changes in partner firms’ resources and beliefs.
Table 13.1 Summary of proposition evaluation
Proposition Description Testing result Proposition 1a The history of business relationships affects the resources Supported firms possess, which influence the building of initial trust in a business relationship. Proposition 1b With a lack of concrete experience of interactions between Supported cooperating firms, the visible and tangible resources have a stronger impact on the conditions of trust at the inception of a business relationship. Proposition 2a A firm’s beliefs in a partner firm, based on its resources and Supported prior history of business relationships, impact the conditions of trust at the inception of a business relationship. Proposition 2b A firm’s self-perceptions of its own resources and value Supported system impact its beliefs in a partner firm. Proposition 3 A firm’s intentions and goals for a new relationship, affected NOT supported by its existing resources and beliefs, have impacts on the conditions of trust at the inception of the business relationship. Proposition 4 As a business relationship develops, a firm’s resources Supported change due to the learning, adapting and interacting taking place. As a result, the nature and extent of trust between partner firms changes over time. Proposition 5 As a business develops, a firm’s beliefs in itself, its partner Supported firm and the value of the relationship change due to learning, adapting and interacting taking place. As a result, the nature and extent of trust between partner firms changes over time. Proposition 6 As a business relationship develops, a firm’s intentions and NOT supported goals for the relationship change due to the learning, adapting and interacting taking place. As a result, the nature and extent of trust between partner firms changes over time. Proposition 7 As a business relationship matures, trust can reach a dynamic Supported equilibrium whereby its nature and extent does not vary with ongoing interactions but remains stable over time as the learning, adapting and interacting in the relationship produce and reproduce a particular level and kinds of trust. Proposition 8 As a business relationship develops, the nature of trust will Supported become more complex. Cognition-based calculative trust will be complemented by emotion-based affective trust. In turn, these types of trust co-exist and interact to drive relationship development. Proposition 9 When a business relationship terminates, the combination of Supported resources a firm has developed through the relationship influences the initial conditions of trust in future business relationships.
The findings in this research further reveal the distinction between trust as an attitude and trusting actions as the behavioral dimension in the dynamics of trust. Trusting actions are purposeful behaviors of firms in a given environment, based on the degree of
324 trust the firms have developed. The overall environment in which firms operate and collaborate shapes their intentions of taking trusting actions through its impact on the firms’ perceived importance of relying on trust and behavioral readiness to do so. Therefore, trusting actions are outcomes of a heavily context-dependent decision- making process. Although conceptually separable, trusting attitudes and trusting actions are interconnected. The existence of trusting attitudes is a prerequisite to the undertaking of trusting actions, while successful trusting actions in turn lead to further development of trusting attitudes between partner firms. They also impact on the confidence and perceptions firms have about the trust partner firms have in them.
Another purpose of this research is to identify generative mechanisms that explain the dynamics of trust. Drawing on the findings of the main case study in particular, a number of driving mechanisms have been identified that include cognitive/psychological processes, social processes, exchange processes and physical processes. These are summarised with exemplars in Tables 10.1 and 10.2. From these tables we can see that the evolution of trusting attitudes is mainly driven by cognitive mechanisms such as learning, perceiving, evaluating and sensemaking, especially the experience and results of actions and interactions. The emergence of trusting actions depends on the operation of a different mix of mechanisms that includes various cognitive, economic, emotional and psychological mechanisms. These mechanisms co- exist and operate in sequence or parallel to produce observable outcomes related to trusting attitudes and actions in business relationships. The activation of mechanisms and their effects are contingent (Danermark, Ekstrom, Jakobsen et al. 1997), in that mechanisms may not be in operation in certain contexts in business relationships.
The remainder of this chapter deals with the following issues. Firstly, the academic contributions and managerial implications of this research will be discussed. Following that, the quality issues of process research are examined and limitations of this research are addressed. Directions for future research are suggested in the third section. Finally, a brief conclusion is presented.
325 13.1 Academic contributions and managerial implications 13.1.1 Academic contributions The existing literature includes numerous models that have contributed insights about relationship dynamics, including the IMP interaction model (Hakansson 1982) and stages models (e.g., Dwyer, Schurr and Oh 1987). These models provide some understanding about how relationships evolve and work. However, contextual influences in the relationship, such as its development stage, the effects of connected relations and interactions and the characteristics and experience of partner firms in the relationship, has been given only limited attention in studies of relationship evolution (Wilson 1995). In addition, while the research conducted so far has identified the different constructs that characterize a relationship at different stages, limited insight is offered into how different dimensions coexist in a relation at a particular time and the transitioning processes from one stage to another, which are necessary in order to provide a holistic picture of relationship evolution (Narayandas and Rangan 2004).
The research reported in this thesis addresses the under-explored issues of relationship dynamics with a particular focus on trust in business relationships. By understanding how trust changes, grows and declines, we are also able to understand key aspects of how relationships change, grow and decline (Lewicki and Bunker 1995). Unlike much previous research, this study develops an evolutionary, process-based model to understand the dynamics of trust. That is, the research does not offer another typology of trust on the basis of logical and deductivist criteria or report correlations and path models between disembodied variables purporting to measure different characteristics of trust and its supposed antecedents and consequences. Instead, it focuses on process and changes over time, how one thing leads to another and investigates HOW (i.e. the processes) and WHY (i.e. the causal mechanisms) changes in trust take place. In particular, this research has made three major types of academic contributions.
Firstly, drawing on theoretical reasoning and case history research, this study has developed a process theory of the dynamics of trust in business relationships. This theory captures the dynamic nature of trust in both attitudinal and behavioral dimensions, i.e. trusting attitudes and trusting actions. While most early researchers have treated trust as an overall concept combining trust as a psychological status and trusting as behavioral reactions, a few researchers have recognized this distinction. For
326 example, Smith and Barclay (1997) consider perceived trustworthiness and trusting behavior as two distinct dimensions of trust that impact on the effectiveness of the relationship. Huemer (2004a) introduces the concept of active trust referring to the trust being activated in business relationships. Their research is enlightening but restricted in that they fail to incorporate into the discussion the contexts in which trust exists and develops, thus failing to provide a complete picture of the complexity of trust. This weakness is addressed by this research, which examines the development of trust over time in actual relationship contexts using case histories. The resulting model, which is presented and discussed in Chapter 10, shows that trusting attitudes and trusting actions follow different but interconnected evolutionary paths involving different contextual factors. The process theory, coupled with a contingency framework, makes a significant contribution to the understanding of the dynamics of trust in business relationships.
Secondly, as discussed in Chapter 3, it is not always clear in the literature what mechanisms exactly are. While many studies claim to focus on searching for mechanisms, often the term mechanism is used casually and sometimes interchangeably with correlations among variables. According to Machamer, Darden and Craver (2000), mechanisms are entities and activities organized such that they are productive of changes from start or set-up to finish or termination conditions. Mechanisms involve different types of psychological/cognitive, social, economic and physical processes that underly all types of behaviors (Hedstrom 2005). These mechanisms are built in from the start and unfold over time based on specific contexts. They trigger the shaping of the patterns of change taking place over time in the relation. It is rather like an agent based computer simulation of a social system that builds in various procedures that control how elements interact and respond to each other and their environment. Once starting conditions are set the simulation unfolds to reflect one history. Changes in starting conditions and contexts alter what happens over time even though the same underlying procedures (mechanisms) do not change.
By introducing the literature of mechanisms with associated concepts and methods to the marketing literature and presenting a field study showing how mechanisms can be identified, this research provides the basis for future similar research. Such research can also inform the development of better simulations of social and business systems, which is discussed later in this chapter.
327 Thirdly, this study contributes to method, to the way we can study change and dynamics in business. It is one of the very few studies conducted that focuses on processes and attempts to identify the key events and generative mechanisms linking them to explain the dynamics of trust in business relationships. More importantly, it is among the first efforts to study the dynamics of trust in actual business relations, using longitudinal case studies and narrative sequence analysis of events, which are in their early stages of development and less well known than variables based approaches. Though some researchers have reported studies on trust from a dynamic perspective (e.g., Lewicki and Tomlinson 2003; McKnight, Cummings and Chervany 1998; Vangen and Huxham 2003; Young 2001), most of these are conceptual pieces with little evidence available to evaluate the propositions. This indicates the challenge of conducting process research that requires a combination of context, sequentiality, contingency and connection (Pajunen 2005). The identification of events and mechanisms enhances the explanatory power of any theory of trust evolution, thus, filling an important knowledge gap. Managers work with actions and events, not variables. Variables don’t act, people and firms do. Hence this research provides an explanation of trust in more relevant terms to managers and policymakers.
The method is not without its problems and ambiguities and thus an important part of the research contribution is development of a method for identifying causal mechanisms from case histories. There are very few examples in the literature of researchers working from an account of a historical process to the identification of underlying mechanisms. The tendency is to illustrate different mechanisms with convenient examples, which provides only limited guidance. Thus I have had to develop my own approach, which is based on a careful reading of the historical account leading to the identification of the key events taking place over time and how they are connected. In doing this the ETHNO program developed by Heise (1989) was used to test and compare with my own interpretation of events and connections. The patterns of events are summarised in temporal event maps and the links between events guides the development of an historical account of the patterns of change in trusting attitudes and trusting actions, as well as the search for and identification and interpretation of underlying processes and mechanisms.
328 While the techniques of narrative analysis hold considerable promise, since it overcomes the defects of static variable-based variance methods in researching process and dynamics, they are still at an embryonic stage of development and are little used so far in marketing. The innovative use of narrative sequence method in this research, including the application of ETHNO, helps to further develop and refine this methodology and apply it in a marketing context.
13.1.2 Managerial implications The results of this study lead to a number of managerial implications. The distinction between trusting attitudes and trusting actions helps managers to realize that the trust developed between partner firms will not be a driving force of the relationship development until it is activated. Therefore, managers should not only invest efforts in cultivating trusting attitudes in the partner firm but also pay attention to the environments in which intentions to engage in trusting actions could be bred so as to promote the undertaking of trusting actions. Being aware that the existence of trusting attitudes does not necessarily lead to an occurrence of trusting actions, managers can also have a better understanding and more accurate interpretation of their counterparts’ actions in the relationship. This helps with the adjustment of strategies in managing the relationship.
Identifying key events, causal mechanisms and processes affecting the dynamics of trust in business relationships further increases the awareness among managers of how trust develops and changes and the extent to which they are able to influence this. The research shows the ongoing changing conditions of trust placed on each other as well as the different contexts in which trusting actions may occur. Thinking about mechanisms provides resources for thinking about strategies for managing changes. If one knows what kind of activities are needed to achieve something, then one seeks kinds of entities that can do it, and vice versa (Machamer, Darden and Craver 2000). This is very different to a variables based explanation, where no guidance is given about how to manipulate variables. Therefore, the knowledge of various mechanisms to explain the development of trusting attitudes and the emergence of trusting actions offers managers insights into the potential roles they can play in managing dynamics of relationships more effectively and efficiently.
329 For example, historical learning builds initial trust in a new business relationship, whereby firms rely on second-hand knowledge to search for and evaluate the value of resources possessed by partner firms, especially the visible ones, to determine the perceived trustworthiness of each other. This indicates that it is critically important for firms to understand the selection criteria of partner firms’ and make their resource value apparent and clear to potential partners through word-of-mouth and building a reputation in a network. As a relationship unfolds and matures, different mechanisms start to operate to drive changes in the level of trust, which require managers to adjust their strategies. For instance, the operation of an expectation-based evaluating mechanism indicates the importance of managing expectations and that managers should maintain clarity and realism in the commitments promised to their counterparts. Priority benefits and qualities should be identified to be pursued in the relationship so as to set up an appropriate level of expectation (Adobor 2005).
The findings in this study reveal that calculative trust has its boundary, i.e, if a partner firm is trusted on one task, it may not be trusted on another unrelated task as assessments of ability may not generalize across all situations (Mayer, Davis and Schoorman 1995). However, the existence of affective trust is less domain specific in that the confidence in the benevolence and integrity of partner firms can be relied on in various contexts, such as being a motivating force to partner firms to open up communication, especially at difficult times, and to take opportunities to develop and expand the cooperation with each other. As this study shows, an effective way to build such affective trust is through extra-role behaviors especially in extra-contractual settings and in unexpected crisis occasions. This is especially true when firms start to have cognitive inertia as a relationship matures. The goodwill exhibited in exceptional occasions is an opportunity to enhance the level of trust in the relationship. Managers cannot easily manufacture a crisis in order to prove and improve trust but they can use trusting actions as an important learning experience and to test their partner’s motives, commitment and trust.
The identification of the critical role of social bonding mechanisms in developing and maintaining the relationship, especially when turbulent changes take place in the relationship, shows the importance of emotions. Personal relationships are effective ways to foster emotional attachment in a business relationship, leading to the
330 personification of companies in the eyes of individual managers. However, when managers are encouraged to develop personal ties with their counterparts in the partner firm, they should be aware of the potential threat of relying too much on interpersonal trust in business relationships. As shown in the main case, interpersonal trust may disappear easily when trusted members in partner firms leave, requiring remaining members to keep things afloat (Vangen and Huxham 2003). The departure of staff and the arrival of new members often disturb the equilibrium, breaking the comfort level of trust between individuals representing the collaborating firms, thus, impacting the level of interorganizational trust. New efforts, therefore, are required to “fast track” new members into the trust-building loop (Vangen and Huxham 2003) so as to pass on and sustain the interfirm trust and minimize the impact of personnel changes on relationship development. This results in two implications to managers. Firstly, interpersonal trust is not equivalent to interorganizational trust. Though the former may help the building of the latter, they are not substitutes for each other. Interorganizational trust develops on a more comprehensive ground that includes not only personal affection but also competency, professionalism and value systems. Therefore, firms should seek, identify and develop these hard cores to build a solid ground on which interorganizational trust can exist on its own. Secondly, the organizational members upon whom successful cooperation depends are “trust guardians” (Child 2001). Trust guardians play an invaluable role in achieving successful business relationships. More trust guardians should be recruited into a relationship’s management to minimize the impact of personnel changes on the relationship. One recommendation is to get more staff involved in interactions with partner firms so as to enhance their exposure in the relationship and to promote opportunities to develop personal ties. The fact that risks still exist after almost a decade of cooperation and that HBB China would consider terminating the relationship if the two American managers in Xtar Sports left the company illustrates the critical importance of training more staff to be trust guardians in business relationships.
In brief, trust is itself a resource that in various ways impacts the activities performed and affects the future of a business relationship (Huemer 2004a). Therefore, firms should be careful in managing the trust placed by their partners. The identification of trusting attitudes and trusting actions further encourage firms to be sensitive to the contextual factors that impact their partner firms’ perceptions, actions and performances
331 in the relationship. Knowing the underlying mechanisms enable managers to potentially shape a process in a more desirable direction and encourage the undertaking of trusting actions by others. Less attention has been focused in this research on the perception of another firm’s trust in your firm but this is another dimension of trust that managers may seek to manage through their actions and interactions.
13.2 Quality issues and research limitations Regardless of whether a variable-based variance method is used or a narrative-based process method, issues of research quality are of paramount importance. The criteria to judge the quality of research include internal validity, external validity and reliability. The goal of variance methods is “to produce context-free generalizations that lead to a reliable and valid prediction, explanation and understanding of the phenomenon studied” (Van de Ven and Engleman 2004, p365). It seeks a covering law with statistical and empirical generalization based on representative samples and consistency of results across contexts. Developing a process theory using narrative methods requires a construction of development and change. Explanations are mechanism-based, built on the recognition and interpretation of events, context and sequence effects. Therefore, narrative-based process methods call for different applications of the concept of validity and reliability.
Internal validity is of particular concern in causal or explanatory case studies (Yin 2003), such as the cases reported in this thesis. It concerns the extent to which researchers can infer the existence of a causal relationship. In processual research, it refers to the activities that ensure increased credibility of findings (Lincoln and Guba 1985). To address this issue, this research followed the advice from Yin (2003) and Miles and Huberman (1994) to conduct longitudinal studies and to offer evidence of triangulation in data sources to justify the evaluation of the importance of events. This research is sensitive to the context-dependent nature of meanings and pays key attention to historical and structural contexts in which the phenomena of interest took place. This sensitivity adds to the explanatory power of the process theory established in this research. The computer software program ETHNO has been used to dissect the running chronology of the narrative and reconstruct it with causal connections. The algorithmic mechanisms in the software formally and analytically diagram causally linked events,
332 enhancing the rigor in establishing a causal relationship to explain ongoing changes and processes.
This research has relied on retrospective data to track changes in trust and to map out relationship histories. This is a limitation of the study due to the risks of memory loss and the selective memory of informants. But as noted by Nisbett and Wilson (1977), the recall of salient events is often reflective of actual events. Furthermore, theories should explain actions in intentional terms (Hedstrom 2005). This means that we should explain an action by reference to the future state it was intended to bring about, which might not be easily achievable in real-time studies.
External validity is another criterion used to examine analytical rigor and research robustness. It refers to the extent to which the generalizability of the explanation can be achieved across different settings and times. It is assumed that alternative means and perspectives are being used to focus on the same issues or phenomena and that together they are able to generate more reliable results by focusing on agreement and commonalities across the dimensions of triangulation (Miles and Huberman 1994). Thus, if different researchers can agree on how to interpret a particular set of observations or if different analytical methods show the same pattern of results, we tend to assume the results are more reliable and valid.
Such assumptions of generalizability can be inconsistent with the assumptions of doing interpretive research such as narrative case studies like this research. Differences in interpretation may be traced to contextual conditions including that of the observer, the observed as well as to the theories and methods employed. Triangulation in terms of each of these contextual conditions is not just a means of establishing the validity and reliability of interpretations but a means of discovering complementary interpretations that reflect the way knowledge and meaning are co-produced in interpretive research through the interaction of observer and observed in different contexts (Huang and Wilkinson 2007). Therefore, results which differ across dimensions of triangulation may reflect inconsistency and bias, but they can also reflect valid results, different yet complementary pieces of a larger puzzle. Different interpretations do not have to agree and different analyses do not have to converge. In promoting a consensus reality, the underlying logic is similar to the dualist positivist distinction between true and effort
333 variances (Thompson 1989). In light of this, the generalizability in process research goes beyond that of aping statistical replication. It depends on versatility, which is “the degree to which it can encompass a broad domain of developmental patterns without modification of its essential character” (Poole, Van de Ven, Dooley et al. 2000, p43). More than one causal network might be valid (Miles and Huberman 1994) and an individual case will not reveal all potentially relevant causal mechanisms but only those operative in that case (Buttris and Wilkinson 2006). If a defensible causal explanation can be produced and justified in one case, then the constituents of that explanation provide a legitimate basis for theory development beyond that case (Easton 2003). Generalizability is contingent and does not have to be universal to have wide applicability. Tendencies, patterns and mechanisms identified in some research can be acknowledged without having to work to be present. They retain their causal power irrespective of whether they are triggered or not (Sayer 2000).
Given the above arguments, the fact that only a limited number of cases are included in this study is a limitation yet not because the small sample size has affected the statistical generalizability of the interpretation. Every case is a single instance that stands on its own (Easton 1995). A small number of cases represent limited types of situations and circumstances in which various changes occur and different mechanisms operate to drive those changes. This indicates that only some mechanisms can be identified in this study to explain the dynamics of trust, thus, constraining the scope of the findings. However, the low statistical representativeness in a case study can be countered by its depth and comprehensiveness. An understanding of the interaction between the dynamics of trust and its context is achieved, based on plausible and logical analysis to identify underlying mechanisms. In light of this, learning from a few cases, conditioned by the environmental context, should be considered as an opportunity rather than a problem (DuBois and Gadde 2002).
Reliability refers to the extent to which the operations of a study can be repeated and yield similar results. In processual research, it is also understood to be the dependability of the research methodology (Lincoln and Guba 1985). In this study, reliability was demonstrated in the credibility of the research established by the triangulated data and context-dependent explanations of events. Reliability was further achieved by presenting transparent statements of the research procedures used (Miles and Huberman
334 1994; Yin 2003). By giving a detailed account of the research process, content and outcome, other researchers are able to carry out similar work and/or build on the work in question (Ryan 2006). The application of the computer software of ETHNO also helps to systematize the analysis, hence, enhancing the reliability in this research.
Objectivity is a criterion related to reliability, meaning the extent to which researchers can render a study beyond contamination. This leads to the awareness of another limitation of this research, i.e. subjectivity. The subjectivity of this research stemmed from informants as well as researcher. As is typical in processual research, this study relied heavily on the narrative data, which is the informants’ description and interpretation of the phenomenon under investigation, as well as on the researcher’s perception and interpretation of such interpretation. Such reliance on subjective description and interpretation has caused concerns over the affect of subjective bias on knowing, understanding and interpreting the phenomena. There is not much one can do about this except to acknowledge such limitations and potential biases and guard against them through triangulation and transparency.
The interview methodology hinged on informants’ subjective interpretations of events, especially when open-ended responses were sought to questions about causal linkages and key transition points in the relationship (McCracken 1988; Zaltman 1997). However, the informants recruited for this research are all managers who are key decision makers in the relationship. Therefore, it was their perception that really counted in relationship development (Narayandas and Rangan 2004). I agree with other researchers (e.g., Kautz, Hansen and Jacobsen 2004; Strauss and Corbin 1998) that we must acknowledge and cannot avoid such a situation when examining phenomena in social contexts, where interpretations must include the perspectives and voices of the people whom we study and interview. But extra efforts were made in this research to minimize the effects of subjective bias. Data were collected from triangulated sources including interviews, company documents and media reports. Key informants were engaged in data analysis especially when unclear and conflicting statements were detected during the construction of relationship history. These tactics enabled the researcher to cross check the narrative data with those from other sources, which reduced the impact of subject bias on the credibility of the research.
335 On the other hand, researchers are not detached observers of the world, but instead, agents embedded in the world, gaining their knowledge through actions in the world (Edelman 2006). The ontological and epistemological stand of researchers guide what researchers want to and can see, thus, becoming a generic constituent in the context in which knowledge is being obtained. As argued by Edelman (2006), truth is not a given but a value that must be worked out during personal and interpersonal interactions. In this sense, restructuring history in processual research is necessarily and unavoidably subjective, with its dependence on the investigator’s personal judgments and interpretations (Halinen and Tornroos 1995). This point is further supported by Gummesson (2003) who argues that all research is interpretive. Even quantitative positivistic research involves respondents translating their answers into numbers, researchers interpreting the meaning of the results in terms of the statistical patterns identified by the research design, the assumptions underlying the statistical tests and the links to theory. There is a universal reality we cannot know, but all we know is what we know, based on the questions we ask, the answers we get and how we interpret them. Therefore, subjectivity is inherent in the research process (Pentland 1999).
In conclusion, the validity and reliability of processual research does not rest with the use of techniques but lies in “a consequence of explicit, systematic and methodologically self-disciplined stance toward data collection and analysis and the use of evidence to advance and sustain inference” (Griffin and Ragin 1994, p18). This research followed these steps but has limitations, including use of retrospective data, a limited number of cases and the issue of subjectivity. The awareness of these limitations reflects the challenges of conducting processual research using narrative data, and guides future research to study processes and dynamics with improvement in these aspects. More avenues for future research are now discussed.
13.3 Directions for future research As observed by Machamer, et al. (Machamer, Darden and Craver 2000), what counts as acceptable types of mechanisms changes over context and time. Therefore, the set of mechanisms discovered in this study is unlikely to be complete. This calls for more case studies conducted at different historical moments, in different industries and relationships to develop our knowledge of generative mechanisms underlying the
336 dynamics. Future studies should take a more networked view (Easton 1992) to investigate the dynamics of trust so as to grasp a better understanding of the impact of a firm’s internal and external environments as well as the interaction between relationships. Longitudinal real-time studies are needed for more accurate understanding and logical interpretation, thus, enhancing the validity of research. The cases studied in this research exist in China, which represent a particular political, economic and cultural environment. As noticed by one of the managers in interview, “in less developed countries, you become much more intense with the partner that you chose, because there is no choice...In a more mature market, if one (relationship) doesn’t fit or one (relationship) doesn’t work out, I will go to another one. It’s never easy to change partners, it never is, but it’s possible (in developed countries). But then, no, at the early time, you don’t have a choice (in less developed countries). You don’t have a choice at all”(Joe Spain, former Marketing Director of HBB China). This implies that business relationships could be managed in different ways when operating in different cultures and different mechanisms and triggers could be observed. This calls for future research to be conducted in other cultural settings to compare findings and provide additional insights into the dynamics of trust in business relationships, as well as the generative mechanisms involved.
By opening the borders of research communities there is much more to be gained than lost (Pajunen 2008). To enhance the knowledge of the dynamics of trust, future research can be conducted in collaboration with neurologists, evolutionists, psychologists and computer scientists to better monitor how information is being processed to adjust the perceived trustworthiness of partner firms and to further investigate how emotional and rational thinking interact with each other in the process to produce decisions of taking trusting actions. Another avenue provided by interdisciplinary work is the systematic and source-critical use of historical materials to improve the efficiency and effectiveness of processual research and the examination of mechanisms (Pajunen 2008).
Agent-based modelling is another direction to further investigate relationship dynamics. Agent-based modelling has been gaining increasing acceptance and usage in various fields, including biology, physics, sociology, economics and management. It is a method of simulating social systems under the complex adaptive system (CAS) paradigm (Kim 2009). According to Holland (1995), a CAS is a system that emerges
337 over time into a coherent form, adapts and organizes itself without any singular entity deliberately managing or controlling it. Following this definition, business relationships and networks can be modelled as a complex adaptive system consisting of diverse agents and their interactions, in which macro-level system behaviors emerge from micro-level behavioral decision rules of the autonomous and adaptive agents and their interactions. In light of this, agent-based modelling represents a new frontier and methodology for conducting research on the dynamics and evolution of complex systems such as business relationships and networks. Causal mechanisms are a necessary part of such models as they must necessarily be represented in the procedures, rules and algorithms driving the simulation the ways in which agents act and interact, learn and adapt.
Some researchers have already taken the initiative to apply this method to capture certain aspects of relationship and network dynamics (e.g., Easton and Wilkinson 1997; Folgesvold and Prenkert 2009; Wilkinson, Wiley and Lin 2001). One of the most recent studies is reported by Kim (2009). His research focuses on analysing human behavior through agent-based modelling and deals with trust and governance mechanisms in supply networks. The study reveals that trust plays an important role in stabilizing the constituent links of a supply network and developing long-term relationships among agents. In his research, the concept of trust is modelled based on the interaction of ordering and supplying decisions only. It needs to be extended in future research in a more comprehensive and realistic way to reflect qualitative factors such as partner firms’ reputation, benevolence and integrity and the emergence of both calculative and affective dimensions of trust.
13.4 Conclusion In conclusion, borrowing the words of Richard Dawkins, we can say that, for a relation, “there is no overall plan of development, no blueprint, no architect’s plan, no architect” (Dawkins 2009, p247). While a relationship is composed of purposeful organizations and individuals, the interdependence among them means that no one is in complete control. A relationship is a self-organizing structure that emerges in a bottom-up way from the local actions and interactions taking place, i.e. it develops over time through the various micro processes or mechanisms taking place locally, as people and
338 organizations interact over time. This produces a particular pattern of activity links, resource ties, actor bonds and schema couplings at any point in time. The pattern affects the extent to which partner firms will or will not have confidence in each other, act opportunistically towards the other and collaborate with each other. This pattern is continually being tested, reproduced and changed through the experience and outcomes of the ongoing actions and interactions (Wilkinson 2008). As part of these processes, trust develops or not and is reproduced or not through time. Trusting actions may be undertaken, based on the level of trust but triggered by intentions shaped in a given environment. The processes that lead to changes in trust and the emergence of trusting actions represent how various mechanisms operate and co-operate to produce the observable outcomes.
Mechanisms are everywhere because that is the way things work, but identifying them is not something we are well trained to do. This research takes initial steps in the journey. When studies of business relationships are moving in the direction of studying dynamic processes, much more needs to be known about underlying mechanisms to explain what we see. It is hoped that the research reported in this thesis will serve as a spring board and more research will be conducted in the future to better construct the knowledge scaffold of the dynamics in business relationships.
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369 Appendix A: Suggested Interview Questions for Informants from HBB China for the XtarSports-HBB Relationship Case
Please note that all the information provided in this interview will be kept confidential from the third party I. Personal background a) How long have you been working in HBB China? What job positions have you held over these years? b) Did you know any one from Xtar Sports before you started working with them on the HBB Open tennis event? c) Have you ever worked with any Chinese company before collaborating with Xtar Sports? If so, how would the experiences affect your cooperation with Xtar Sports?
II. Initiation of XtarSports-HBB relationship a) How did the relationship get started? i. What was the situation of HBB China at that time? ii. What was your initial perception of Xtar Sports? Why did HBB China agree to start the cooperation? iii. What was HBB China’s initial expectation of Xtar Sports and of the relationship?
III. Development of XtarSports-HBB relationship a) How would you describe the development of the relationship with Xtar Sports over the years? Were there any critical events that affected your perception of Xtar Sports and the relationship? i. Was the 1st year of cooperation eventful? Why did HBB China renew the contract in the end of 1998? ii. Do you think the relationship with Xtar Sports has changed over the years? If so, in what way? iii. Do you think the relationship with Xtar Sports has been affected by the market performance of HBB in China? iv. Do you think the relationship with Xtar Sports has been affected by other relationships that HBB China was involved in? v. How would you describe your relationship with individual managers in Xtar Sports? How did it develop and what role did it play in the business relationship? vi. Were there any problems, difficulties or crisis occurring in the relationship while you worked in HBB China? Would you pls. describe and explain their impact on the relationship?
Thank you very much!
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